France is in the grip of social breakdown, with financial chaos looming. The urgent question now is: could it spread? A leading expert on Europe and its discontents, Wolfgang Münchau explores how the next debt crisis might start — and how it could both destroy the eurozone and scar Britain’s economy. 

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“The Irish say they are not Greece. The Portuguese say they are not Irish. The Spanish finance minister said last week that Spain is not Portugal.” I wrote these words in the Financial Times over 15 years ago, as the eurozone sovereign-debt crisis raged. Fast forward to today, and the big news is that Belgians are not French. Expect, soon enough, to hear that Italians are not Belgian. With all eyes currently on France, on the violence, the protests, and the rising possibility of a genuine financial crisis, the key question now is how such a crisis might spread.

The first eurozone country in the firing line today is Belgium. Like the French, the Belgians allowed their budget deficit to rise, and the national debt to soar. To be fair, the country’s leaders are aware of the risks. To quote Bart De Wever, Belgium’s prime minister and one of Europe’s smarter leaders: “We absolutely must distance ourselves from the French situation to prevent it from spreading to us.” He might as well be telling us that “Belgians are not French”.

In the event, I worry De Wever will have less control over the situation than he thinks. That’s partly because Belgium’s debt-to-GDP ratio — at 108% — is so high. But also because the other two countries in the danger zone are France and Italy: respectively the EU’s second and third-largest economies, and two of the most indebted countries in the bloc.

At the moment, French costs on 10-year bonds is over 5%, with the Italian rates a little lower. To be clear, neither of these rates are in crisis territory just yet — but they are getting closer. Once interest rates exceed a certain threshold, a doom loop sets in. Higher interest rates raise debt servicing costs, which drives up the budget deficit, which drives up borrowing, and which again drives up interest rates.

No one can tell when, exactly, a crisis might arrive: it depends on the country and its politics. Yet once investors conclude that a country cannot conceivably afford to pay the debt, interest rates will surely start to jump, the mechanism through which practically every financial crisis plays out. We are in the phase where everybody still pretends that the situation is under control, and that all that needs to happen is for governments to save a bit of money here and there. In practice, though, ministers of all stripes find this hard.

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Just recall that France is in its current mess because of Emmanuel Macron. Who could have predicted that his decade-long presidency would end with his country in flames, and with a financial crisis looming? Yet the policies Macron pursued earlier in his tenure nonetheless led him here. The austerity imposed by his government bred more violence, while cuts in public investment deterred private investors.

Looking at the presidential candidates in France today ahead of the election next April, I struggle to see how the country will end up with a government that succeeds in doing all of the following: bringing the budget deficit under control; avoiding social unrest; complying with European rules; and staying in the eurozone. Something has to give here.

Nobody, not even leading French candidate Marine Le Pen, wants to quit the eurozone. Nor, for that matter, does Jean-Luc Mélenchon. If you thought Brexit was disruptive, a euro exit would be on a different order of magnitude. Yet what many Europeans, including politicians, don’t understand is the relationship between debt and membership of the eurozone. Put simply: you can’t default on your debt and expect to keep the euro. Debt serves as collateral for the money the banking system gets from the ECB. If a country defaults on its debt, the banking system inevitably freezes up.

Given these fundamentals, how might a eurozone crisis actually play out? Le Pen, even more likely to win the presidency now that Paris is burning, is probably crucial here. One option is that, notwithstanding her rhetorical largesse on the campaign trail, she decides to impose austerity once in the Élysée. Her popularity ratings would soon slump, and would likely not recover. You might think this is totally irrational, but we saw this pattern repeat itself over and over again during the eurozone crisis.

Alternatively, Le Pen might conclude that France cannot service its debt if interest rates stay high. She could therefore ask the European Central Bank for a bailout. If the ECB refused — helping France would drive inflation up for everyone — a President Le Pen might instruct her finance minister to default on a payment to bondholders.

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In the short-term, at least, there are advantages to such an approach. First, it would free Le Pen up to default on more foreign debtors. That, in turn, could allow her to impose less austerity than she might otherwise have had to. France also would benefit from lower debt-servicing costs, and a more competitive exchange rate, making French companies more competitive against the rest of the world. And perhaps most importantly, France will have its own central bank, one able to set interest rates suited to the country’s economy, and which could be relied upon to act as a backstop in a crisis.

All the same, France defaulting on its debt would likely lead to a French exit from the euro. Should we ever get to this point, the ensuing financial crisis would dwarf everything we have ever experienced. Financial institutions would fail all over the world. For its part, the eurozone might not survive, as other countries default on their debts and crash out in turn. Ironically, one of the European countries most affected in this scenario would be the UK. Despite not being a member of the EU, let alone the eurozone, Britain’s capital market would be deeply vulnerable to chaos across the Channel.

You might well wonder why anyone in their right mind would choose this scenario. The problem is that we’d only get to the implosion of the European financial system after several other things happened first. No one would choose it from a menu.

I’m not saying that there’s no way out. But none of the alternatives are obvious or easy. Leaving the eurozone might well end up being the easiest option, especially if you don’t care about the consequences for the rest of the world.

Having spent a good part of my career writing about the eurozone’s financial crisis, and its ongoing economic decline, I concluded that the one big mistake the EU committed was to choose a monetary union without installing the necessary political infrastructure first: a fiscal union, a single capital market, and a single sovereign debt instrument. The introduction of the euro was the crowning achievement of Europe’s political integration in the Eighties and Nineties. Then it stopped.

This is not an argument about the pros and cons of European integration as such. If you oppose political integration, you should not join the euro. The UK’s opposition to the euro was internally coherent. Poland is an example of a country that would not dream of leaving the EU, but it, too, chose not to join the euro. But what we’ve learned in the last 15 years is that if you join a single currency, you don’t want to stop there; you must go all the way. This is where the bloc went wrong. A half-way house of an unfinished monetary union is unsustainable. By unsustainable, I don’t mean bad. Just that either it’ll be made sustainable — or it’ll end.

Some people argue that political integration may yet happen. I fear this is wishful thinking. The politics of the EU has been moving away from political integration for quite some time; the euro crisis was probably the last moment when a fiscal union could have been realistically agreed. Back then, the far-Right was not yet a political force in most countries, while Germany’s economy was strong enough to theoretically accept a closer union. The fact that, even then, Angela Merkel said nein is telling — certainly, in its newly weakened state, none of Germany’s bickering political parties even mention EU integration today.

Superficially, the euro crisis ended when the ECB supported national bond markets through quantitative easing. But the underlying problem of economic divergence between member states was never really resolved, even as the solutions were only designed for small economies. So, if you tell me that France is not Greece, I’d happily agree — except to add that it’s worse.

Then Trump turned toward Iran. The Russia-Ukraine war dropped in US foreign policy priority list. Now, because of oil and gas, it’s back at the top again. Trump realized that he cannot be at war with two of the largest oil and gas countries in the world. Iran may only be seventh on the list of the world’s largest oil producers, but by closing down the Strait of Hormuz, Iran indirectly affects some 20% of global oil production.

Russia, however, is the world’s second largest producer of both oil and gas. The Europeans dismissed the recent US-Russia diesel deal as another stunt by Trump, and it’s true that it won’t affect gasoline prices in the US by much. If it had been an isolated deal, I wouldn’t have paid much attention either. But it wasn’t. Trump followed up with actions he had hitherto shied away from.

The first sign came last Wednesday morning. Ukrainian media reported that, overnight, the country’s forces had experienced sudden restrictions on Starshield, the military part of Elon Musk’s Starlink satellite system. Ukrainian drones were losing signal when they traveled faster than 160 kilometers per hour. The sudden throttling of the service disrupted several Ukrainian drone missions.

The presumption within Ukraine was that SpaceX had imposed those restrictions on behalf of the US government. And the next day, Reuters reported that the order came directly from the White House, which had been angered by Ukraine’s continued targeting of Russian refineries. So this was not a technical service disruption, but a ruthless application of the kill switch. All we got from the White House, though, were news leaks. No official statements. Not even a tweet. For the Trump administration, this is not normal.

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Along with the news of the throttling of Starshield came suggestions that the US had ended intelligence sharing. On the night of 12 October, Russia launched a volley of ballistic missiles at Ukraine. Normally, US intelligence would give the Ukrainians a warning. But on this occasion, there was no heads-up — and the results were horrendous.

Until that point, intelligence sharing had been one of the most important components of the defense of Ukraine. The Americans have satellite-based infrared systems that can detect ballistic missile launches, and the Ukrainians could rely on it.

But things had changed. Two days after the attack, it was reported that the White House had discussed ending the sharing of intelligence. John Ratcliffe, the CIA director, wanted to continue sharing intelligence — but others, it seems, didn’t. Trump denied that the US had cut intelligence sharing. Indeed, it is possible that Russia may have used weapons that resisted detection. We should at this point treat the disruption of information flows as suspicious, but unexplained, even if that flow now seems to have definitively resumed.

Then, late on Friday, Trump used an executive order to waive the implementation of sanctions against Russia under the Graham Act, whose goal was to deprive Russia of financial resources that allow it to wage war against Ukraine. Named after the late Senator Lindsey Graham, Trump had signed it into law only last month.

The secrecy, the reports of meetings inside the White House, the reports from Ukraine itself, and the suspension of the Graham Act: together these developments give us a coherent picture, even if some of the details are still missing. They tell us that the US is no longer actively engaged in the defense of Ukraine.

That’s different from the situation in late February last year, when Trump and Zelensky clashed in the White House. After that meeting, the US paused weapons deliveries and financial assistance. The White House also cut off intelligence sharing for a week, but then resumed it.

But what the Americans are doing now is far more coordinated. And it presents the Europeans with a conundrum. They will attempt to mitigate the effects of this change in US policy, however, there is not much they can do. They can offer intelligence from their own satellite network, but this will not match the communication quality Ukraine’s fast drones require to function as intended.

Nevertheless, Zelensky turned up at the European Council in Brussels last week, where EU leaders took another opportunity to show their solidarity with the Ukrainian leader. He is a regular guest there. But beneath the bonhomie, tensions are rising. Ukraine is running out of money faster than the Europeans had expected. Last December, the Belgians vetoed the sequestration of Russian funds that are sitting, frozen, in a Belgian bank. The EU reluctantly agreed a €90bn loan to Ukraine, money they themselves borrowed, pretending that Russia would eventually have to pay back this loan. The loan was supposed to plug Ukraine’s funding gap for this year and next.

As it turns out, Ukraine now needs another €70bn. Marine Le Pen, the front-runner in the French presidential election race, has promised that, if elected, she would cut off all support for Ukraine. Friedrich Merz, the German chancellor, has promised more funding, but this money is not showing up anywhere in his government’s own budgets.

While Zelensky revels in the public admiration of Europe’s leaders, then, the foundations of Western support have been getting shakier. Now it is getting even harder, because the US is actively conspiring against Europe. The deal under which the US buys 4.8 million tons of diesel from Russia looks like an attempt to restart commercial relationships. I expect this will be the first of several natural resources deals between the US and Russia.

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I could, for example, see a deal struck over Russian gas. Envoys have been discussing extending their new commercial partnership to the defunct Nord Stream pipeline that used to carry gas from Russia to Germany. This would be an ironic twist, because it was the first Trump administration that placed sanctions on the German and Russian operators who were building Nord Stream 2, a successor pipeline.

In September 2022, the section of piping that runs below the Baltic Sea was sabotaged. A Ukrainian commando is accused of being behind the explosion. The trial against one of the suspects started in Germany last week, and it promises to give us a lot of details of this operation, including information about the extent of Zelensky’s involvement.

Germans will be watching closely. Like Marine Le Pen’s National Rally, the hard-Right Alternative for Germany is also opposed to Ukraine aid. The AfD has, over the past year, enjoyed a fast rise in the opinion polls. The Ukraine war is one of the themes most central to its campaign, and the trial will be a gift to them that will keep on giving.

Trump’s negotiators recently pressed the Europeans to release parts of the frozen Russian assets: to make them available for a special Ukraine investment fund, rather than directing them toward further fighting. The Europeans rejected this request, because their plan is to fund Ukraine’s war with Russian money. I am reminded of the old Thatcher joke about why socialism does not work: because socialists run out of other people’s money. If the EU got its wish and were able to sequester the Russian money, given how fast Ukraine is spending money, it would not last for long.

Additionally, the EU is exploring the possibility of giving full membership of the bloc to Ukraine, but membership can only help fund the reconstruction of Ukraine if accompanied with large fiscal transfers. Right now, Germany is leading a group of countries that are opposing a plan by the European Commission to increase the size of the next EU budget. The Europeans say one thing, but do another: a classic case of revealed preferences clashing with stated preferences.

Politically, and financially, the room for maneuver by the Europeans is decreasing. The Europeans need the US, but the US, having enthusiastically supported Ukraine under Joe Biden, has become first a reluctant supporter and now a country that no longer pretends to support Ukraine. I doubt very much that, come 2029, even a Democratic president would expend political capital on a war, which by then would have been waged for seven years.

Wars usually end when one side is running out of food, oil, or other critical supplies. It is delusional to think that with an oil price at $110 a barrel, the world’s second-largest oil producer is running out of money. The war will end eventually, most likely with a dirty peace deal that will leave the Europeans in shock.

I suspect that it will happen during the remaining two years and three months of the Trump administration. Trump has been too inconsistent for any such forecasts to be made with complete certainty. But I am confident that last week’s decisions will go down as the turning point in this war.

More than his story, though, it’s Fo’s title that feels most relevant to contemporary France. For it’s quite possible that the country will, at some point, stop paying its debts. If debtors can’t pay, they won’t. But a debtor who can theoretically pay might still choose not to. As one of the richest countries on Earth, France has no excuse on that score. But when politics intrudes, all bets are off, with ominous consequences far beyond bank balance sheets.

The economics here aren’t hard to grasp. Surpass a certain threshold of debt, and France risks ending up in a debt trap. Borrow too much — and public debt is already at €3.6 trillion, accounting for 119% of GDP — and creditors will get so nervous that they start selling. With more sellers than buyers, interest rates go up. This, in turn, raises the cost of servicing future debt. Countries tend not to notice this process at first — but then, from Sri Lanka to Argentina, it just happens.

When nations fall into a debt trap, there are four potential escape routes. Perhaps the starkest option is simply defaulting on their debt. Then there are two forms of belt-tightening: either enforcing austerity via higher taxes and lower spending, or selling state-owned land or companies. Finally, central banks can bankroll their governments and print more money, which in practice means buying government debt. That last strategy helps push interest rates down, much like what has been happening lately in Japan.

Politics determines which combination of those four options are chosen. The French electorate has for quite some time not voted for candidates who prioritize balancing the budget, something considered distinctly uncool within the country’s political culture. Indeed, the two candidates which polls now predict most likely to enter the second round of the next presidential elections also happen to be the least fiscally responsible: Marine Le Pen, leader of the Right-wing National Rally, and Jean-Luc Mélenchon, head of La France Insoumise, which translates as “France Unbowed”.

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In the case of Mélenchon’s party, we might well ask: unbowed to what exactly? The bond markets? Mélenchon favors the cancellation of French debt held by the European Central Bank. To achieve this, he suggests an old financial wheeze: keeping all the money France has borrowed, never paying it back, and never paying interest on it either.

Mélenchon’s “perpetual zero-coupon” trick — as this scheme is officially known — is a technical way of saying that he wants to default on his country’s debt. The idea is that this would give him scope to raise more debt to fund his electoral spending promises. Yet there is no way Mélenchon could get the rest of the EU, especially Germany, to agree to this. If he were to be elected, and really did proceed with his plan, France would likely crash out of the eurozone and even the EU itself.

To be fair, the polling numbers will probably change between now and the first round of the presidential election next April — but it’s not clear how. An air of insurrection has descended on the hexagon, and that may well play into Mélenchon’s hands. After all, a protest by high-school students, sick of their overcrowded and dilapidated classrooms, has now spread from Paris to the rest of France. Last week saw 250,000 students take to the streets, forcing the closure of some 500 schools.

The protests also saw eruptions of spontaneous violence, with demonstrators throwing projectiles at police, and setting cars and buildings on fire. By the end of the week, officers had arrested almost 7,000 mostly young people, of whom a third will face prosecution. Not that this is merely an insurrection of the poor: even students from elite schools, like the Lycée Henri-IV in Paris, have joined their fellow teenagers, frustrated by crumbling schools and rising state violence. Mélenchon taps into this febrile atmosphere like no other politician.

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Marine Le Pen represents the other end of the political spectrum: the France of the angry rural middle classes. She has been leading in the polls for a long time, and her conviction in a trial about the abuse of EU funds has had no impact whatsoever on her popularity. Just as lawfare did not work against Donald Trump, it didn’t work in France either, even as there have been rumors that the gilet jaunes, who paralyzed the country back in 2018, could yet turn out to join the students.

Unlike Mélenchon, to be fair, Le Pen doesn’t want to default on French debt. But if she follows through with the tax and spending program she outlined last week, she might end up in a similar place. One of the biggest sources of new income would come from a unilateral two-thirds cut to French contributions to the EU budget, a policy with history. Before it was called the National Rally, Le Pen’s party was called the National Front — and under its leader, Marine’s father Jean-Marie, leaving the EU was a core policy.

Marine, too, supported France’s withdrawal from the EU until 2019. She no longer talks about “Frexit” in explicit terms, but her policies are as inconsistent with EU membership as Mélenchon’s. The EU would cease to function if France were to default on its membership contributions — just as it would collapse by defaulting on French debt, with Germany and the Netherlands left as the only countries bankrolling the operation.

Of course, six months to go until the first round of voting, and it’s still possible that a centrist politician might emerge as a viable candidate. But to win, such a person would still have to default in one form or another. Perhaps bondholders would still get what they were promised — but pensioners or students or farmers would need to be sacrificed to maintain France’s fiscal position.

What I struggle to see, though, is any scenario where a radical centrist like Macron could emerge as a surprise winner and return the country towards a path of liberal centrist reforms. Macron, after all, was elected back in 2017: and his political experiment has failed both politically and economically. As France is approaching the end of his decade in power, French cities are burning, and financial markets are wondering whether France will default on its debt. This was not the way Macron’s centrist revolution was supposed to end.

France falls into the category of countries that are too big to fail — and too big to save. If it refuses austerity for political reasons, it will also refuse the sale of assets. They are not going to auction off the Mona Lisa or the Bayeux Tapestry. This leaves us with exactly two ways out of the crisis: some combination of a default, and a bailout by the central bank.

Certainly, the European Central Bank (ECB) could simply buy French debt. This would lead to lower interest rates on French bonds, but wouldn’t resolve the country’s underlying debt problem. Indeed, the ECB could take its support to such extreme levels that the eurozone itself ends up with higher debt and inflation, with other countries lining up to demand support. Italy’s public finances are much better managed than France’s, for instance, but Italy also has higher levels of debt relative to the size of the economy.

The ECB could therefore find itself in a position where it’s damned if it helps France — and damned if it doesn’t. This is the fundamental problem with the eurozone: once the big countries diverge in their politics and economics, the end is nigh. The only thing that can help you then is a political union that enforces convergence. The eurozone crisis was the last moment when such a union could have been established. But instead of solving the bloc’s underlying financial problems, EU leaders did the bare minimum needed to prevent the emergency from spinning out of control, for instance by granting cheap loans to already over-indebted countries.

We used to say back then that Brussels was kicking the can down the road. Well, we are now at the end of the road, with a skip full of cans piling up around us. Certainly, with far-Right parties in the ascendance everywhere in Europe, union is too late today, even as high inflation means the ECB has far less room for maneuver than it did a decade ago. No one can predict how things will play out from here: but some form of financial crisis is probable.

This returns us to Fo’s play: and the basic difference between Italy then and France today. Can’t Pay? Won’t Pay! was about a dispute within the Italian Communist Party, which at the time had abandoned its radicalism, accepted austerity, and moved closer to the political center. Fo himself was a hardliner. As he once said about capitalists: “the only way to get that mob thinking straight is to stuff them down the bog and pull the chain!” That’s Mélenchon’s language too — except that unlike Fo, his dramatics aren’t limited to the theatre.

Is reigniting the Brexit wars really a clever idea? I personally favored Remain in 2016 but became disenchanted by the campaign’s excessive focus on dubious economic claims. I argued at the time that Remain should offer a positive vision of Europe, rather than doom-mongering. But if Burnham asked for my advice today, I would tell him: don’t look at the polls. Don’t worry about “Bregret” or Labour Party politics. Look instead at the state of the EU, which has changed dramatically since 2016. 

Right now, the EU is not a club you’d want to join. In fact, the sensible Icelanders recently voted against pursuing EU membership. Despite barely surviving the Eurozone’s sovereign debt crisis, the EU never bothered to fix the underlying problems that triggered it, such as a fragmented banking system and the lack of a common capital market. Now another sovereign debt crisis could soon be on the horizon, with French interest rates going through the roof. And if the polls are right about France’s presidential election next year, the political center might shrink or even disappear as a political force, leaving France and the Eurozone under the influence of the far-Right. Does Britain really want to be in the same club as President Marine Le Pen or Chancellor Alice Weidel?

If Britain were to foolishly seek to rejoin, it would doubtless get a raw deal. For one thing, the EU will not be able, or willing, to offer the UK any rebates or opt-outs. In the past, such concessions have been achieved through diplomatic master strokes. Margaret Thatcher negotiated the rebate after driving everybody crazy about the issue. John Major landed the opt-outs, including from the euro, because he would otherwise have vetoed the Maastricht Treaty in 1991. But the age of miracles has passed. Since then, the EU’s finances have deteriorated. Germany is no longer prepared to bankroll the EU as generously as it once did: the fractious coalition in Berlin needs all the money it can get just to survive. Meanwhile, Le Pen has pledged to reduce France’s EU budget contributions. If she succeeds, other European nations will have to pay more; if she does not, she will almost certainly block anyone else from getting a rebate. I cannot conceive of any political constellation that would allow for Britain to rejoin on the cheap. 

In fact, according to my calculations, Britain’s annual contributions to the EU budget would be around £30 billion in today’s money if it were to rejoin. That’s about half of the UK’s entire defense budget. How would Chancellor John Healey pay for this: by cutting defense or welfare spending, or else by raising VAT? Pray tell! 

You might now accuse me of knowing the price of everything and the value of nothing. So let’s talk about value for money. For the most part, Britain’s EU contributions would not go toward investments, such as cross-border railways, hyperscalers, or nuclear fusion. Instead they would be redistributed to other member states. Where is the value in that? 

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There’s another, even bigger obstacle to Britain rejoining the EU: Artificial Intelligence. What almost nobody engaged in the Rejoin debate is thinking about is the sheer extent of the EU’s anti-tech crusade. Since Brexit, the Luddites in Brussels have passed a large number of laws seeking to control the spread of digital technologies and impose their will on the global tech industry. Of these, the 2024 AI Act would be particularly damaging to the UK’s prospects. The European attitude to AI is best exemplified by the German media, which only ever publishes news stories that emphasize the dangers of AI. It views AI as a means through which evil American entrepreneurs could destroy European culture. 

Of all the policy mistakes the EU has made over the years, its tech legislation must be both the most stupid and the most significant. The EU believed in the story that it kept telling itself: if America was an innovation hub and China a manufacturing powerhouse, then Europe was the global regulator. For sure, it used to be. But that was only because world-leading European manufacturing companies, such as the German car makers, set standards for the rest of the industry. Today, by contrast, only four of the world’s 50 largest tech companies are European. The EU has lost the AI race and as a result it has no leverage in the global debate over how AI should be regulated. That debate is limited to Anthropic, OpenAI, the US government, and to some extent China.

Unlike the EU, the UK is a player in AI — albeit a small one. Brexit was not an economic success story overall: in fact, I’d call it a macroeconomic non-event. But AI was a silver lining. Last year, AI investment in the UK took off. This year, the UK poured more capital investment into AI than the whole EU; in a few years’ time, it will probably have invested even more.

Yet if the UK were to rejoin the EU, it would have to sign up to all of Europe’s tech regulations, including the onerous AI Act. If that happened, all current and future investments into UK-based AI firms would be at risk. There is no way the EU would allow the UK to maintain its liberal regulatory regime and become Europe’s only technology hub. And I struggle to imagine a UK government voluntarily strangling what could eventually become the country’s most successful industry.

Given the way the EU is run right now, the UK cannot conceivably return. But Burnham has reduced the question of rejoining to shallow identity politics. The EU is an abstract placeholder for progressive multilateralism. Many of the loudest advocates of EU membership think of business in terms of clichés: they insist, for instance, that business always benefits from the single market — but for many industries including AI, that is just not true. I don’t imagine that many Rejoiners are considering how EU membership would affect the fledgling London-Oxford-Cambridge tech triangle. To do so would upset their lazy narratives. 

In the end, I felt the same way about Leave and Remain as Henry Kissinger felt about Iraq and Iran. He wanted them both to lose. Now, I feel just as pessimistic about Rejoin.

Certainly, Radoslaw Sikorski, the Polish foreign minister, is prepping for it. “I have stocks of rice, I have a hand pump at home, and I have also made preserves from fruit from my own garden,” he told the Polish magazine Fakt last week.

It is easy to mock Sikorski and his jam. But he does have a point. In times of war, nobody cares about the percentage of GDP that their country is spending on defense: they care about food and water. Not  that our military leaders and planners will listen, though; soldiers like to talk about battles and gear, not rice and jam.

Tales of heroic battlefield victories are far more persuasive, after all, than those of supply chains. And yet, defeat often comes because of weakness elsewhere. A few years before Napoleon lost his famous battle at Waterloo, he had launched a disastrous attempt to invade Russia. Although the brutal winter contributed to his failure, Napoleon had struggled to keep his troops fed and healthy. Hunger and disease took a terrible toll. As much as the enemy, it was his supply chains that thwarted him.

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Likewise, when the German high command unveiled its master plan to invade France in August 1914, the generals hadn’t factored in an unexpected heatwave. The right wing of the German army was to invade France from the north and encircle Paris. But the soldiers were marching in thick woolen uniforms and carrying heavy backpacks in 30-degree heat. As the men advanced, the supply lines fractured leaving the troops exhausted, hungry and weakened.

Meanwhile the Allied naval blockade of 1914 triggered food shortages in Germany which escalated over the years into a full-blown humanitarian catastrophe. Germany and Austria did not lose the First World War on the battlefield alone, they also lost it in the warehouse and the kitchen. The people starved.

The food situation was better during the Second World War, but this time the critical shortage was of oil. Back then, the US produced over 60% of the world’s oil and together, the Allied powers controlled most of the global oil supply. But the German generals were heavily reliant on machinery that used diesel and the chronic shortage of oil was why Hitler diverted his troops from the outskirts of Moscow to the south of Russia: to capture the oil fields in Azerbaijan and the Caucasus. En route, they became trapped in Stalingrad and suffered their worst defeat of the Second World War.

The battlefield perspective of history, then, critically underestimates the importance of supply chains. The stories of Europe’s wars are understood much better in terms of logistics than in tales of battles.

And nothing has changed. One of the consequences of the Iran war is the fluctuating cost of crude oil. But that is only part of the story. As the Ukraine war has led to critical shortages of diesel and kerosene on global markets, the price of European diesel has gone through the roof. In a display of his classic short-termism, Donald Trump suggested that the US should stop supplying Europeans with diesel. He almost certainly did not think this through. If the US were to carry out his plan, Europe would suffer an immediate supply emergency. And we need only look at the vast number of diesel-powered lorries on European motorways to realize how critically reliant we are on the fuel. The economy would grind to a halt. It might be a smart idea if our leaders addressed that situation before heading into battle with the Russians.

But it’s not just diesel. The other shortage is natural gas. Iranian attacks have taken out 17% of liquid natural gas (LNG) production in Qatar, the world’s second largest LNG producer after America. Russia is the fourth — but Europeans have imposed an import ban on their gas. That’s why Europe is currently assessing whether it has enough fuel to get through the winter. And remember, this is still peacetime.

On the other side of the ledger is Russia. It, too, suffered from a diesel shortage last spring after Ukrainian attacks on its energy infrastructure. But Moscow immediately increased production in the east and halted exports of diesel to stabilize the situation. By doing so, Putin reduced the globally available supply of diesel and contributed to the rise in prices.

Russia’s food supply is also secure. This year, it had a bumper crop of grains, the wheat crop is forecast to be one of the best on record and oilseed production is also better than usual. Is this the “bad position” Rutte was talking about?

And let’s not forget those other vital commodities: good, old-fashioned money and debt. Russia is practically debt-free. It runs a small fiscal deficit because of the Ukraine war, but nothing compared with the crippling deficits of the US, France, and nowadays also Germany.

As a consequence, the West is vulnerable to a potentially crippling financial crisis. Last week, the interest rate on 10-year US Treasury bonds, the most important financial security on earth, rose to a 21-year high of 5.2%. Ordinary investors such as pension funds are dumping their US bond holdings because they are no longer secure following Joe Biden and Donald Trump outbidding each other in terms of fiscal irresponsibility.

All the while, the war in Ukraine drags on. And could get much worse this winter. The peace process is effectively dead; Putin gave up on it after Ukraine rejected his demand for the entirety of the Donbas region and is now determined to achieve his military goals by war alone. Ukraine is running short of interceptor missiles and so is more vulnerable to attacks on critical infrastructure. And there is no sign of Ukraine’s western supporters stepping up military supplies — if only because they need what they have for themselves. Exacerbating the situation in Europe are the attacks, possibly orchestrated by Russia, on western supply infrastructure for Ukraine within Germany and Poland.

So this is how the Ukraine war risks escalating. Consider if Russia shoots down a plane over Nato territory carrying supplies to Ukraine. If Nato were to retaliate with a strike on Russia, we would be at war. Over the past few months, my assessment of this scenario has shifted from small but non-trivial, to one with a significant probability.

We should be under no illusion about a war with Russia. We are absolutely not in a position to win. Whose bond markets are going to be blown up first? Who is going to run out of interceptor missiles first? Thanks to the much maligned Common Agricultural Policy, Europe is not going to run out of food. But on every other count — military, energy, finance — Europe is at a disadvantage.

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That’s not all. There is a relatively plausible scenario in which Ukraine and Iran merge into a single West Eurasian war — and become the ultimate proxy conflict between the US and China. The love-in between Trump and President Xi Jinping of China notwithstanding, the rivalry between the US and China is and will remain the dominant geopolitical story of our time.

Trump’s war against Iran and Putin’s war against Ukraine have demonstrated how difficult it is even for a larger power to impose its will on a smaller adversary. Putin may have the advantage over Ukraine, but his struggles there suggest that war against Nato wouldn’t produce a quick or decisive victory.

More likely, it would be the kind of war where, in the end, nobody would care who won and who lost. You might as well stock up with jam.

In Musil’s writings, I see parallels with today’s Europe. Our time, too, might one day be known as a pre-war era. After all, if Germany was the up-and-coming power in 1914, China is today. The UK was then the biggest global power, like the US today. The equivalent of the Austro-Hungarian Empire in 2026 is Russia: a once-great power in terminal decline.  In hindsight, one of the omens of the First World War was the emergence of political and military alliances that were intended to protect but which ended up becoming conduits of war — such as Germany’s alliance with Austria, Russia’s with Serbia, and France’s with Russia.  

The alliance between the EU and Canada — which was strengthened last week, when the EU proposed that Canada somehow become its first “associate member” — is militarily not as consequential as those that led Europe to the killing fields. Yet it has something of their essence. It has a certain Musil-like quality too — just another parallel campaign in a world soon to be extinguished.

Mark Carney likes giving spine-stiffening speeches in defense of the passing multilateral order, while Ursula von der Leyen, president of the European Commission, poses for as many photos with Volodymyr Zelensky as possible. But surely, like Musil’s dreamers, both Carney and von der Leyen have more important things to do? For the EU is not a global power, but something much more down to earth: a customs union and a single market, plus a monetary union among most of its members. These three functions are the only ones that ever mattered. Yet instead of focusing on the EU’s core economic problems, where she has the power to bring about change, von der Leyen is engaged in a performative dance with Carney. 

The Canadian prime minister, too, has unresolved problems at home. Canada’s biggest trade barrier is not the one with the US, but its own internal system. Canadian provinces are like medieval European fiefdoms, imposing trade barriers against each other. It is a vast country, but it is not a single market. Why not solve that problem first?  

So the issue with the EU-Canada pact is not so much that it is wrong, but that it is vacuous, or, as, Musil would put it, without qualities. In 2014, the EU and Canada signed a trade deal, the Comprehensive Economic and Trade Agreement, or Ceta, which took provisional effect in 2016. Ten years later, this treaty is still not formally approved, because 10 EU countries, including France and Italy, have refused to ratify it. If you are really interested in solidifying the EU-Canada relationship, would you not start there? My theory is that von der Leyen and other politicians are simply bored with the single market, and find a G7 or G20-type set up far more glamorous.  

The UK-based European Council on Foreign Relations, together with the Netherlands-based European Cultural Foundation, recently published a poll that found 70% of Europeans were euroskeptic. I was not in the least surprised by this result, but it came as a shock to the authors, who subsequently recommended that the EU engage in even more performative stunts. They wrote that to foster pro-European attitudes, Brussels should harness “the power of future nostalgia, or a longing for a time when a better future seemed within reach”. In other words: keep your eyes off the ball for a little while longer, while appealing to our glorious past.  

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The stunt with Canada is about exactly that — nostalgia for the age of globalization that has now vanished. Canada and the EU entered the new era of globalization as second-rate powers, led by third-rate politicians, but they ended up being the big winners. I still recall the uncritical British deference to Carney when he arrived as governor of the Bank of England. He was the highest-paid central banker in the world at the time: apparently he needed the money to send his children to a private school. This all happened in 2012, an age when non-doms, now an extinct species, roamed the streets of Mayfair. This is the world Carney wants to return to — the world he knows. 

The obvious problem with Canada’s aspiration to become an “associate member” of the EU is that no such membership exists. Veterans of the Brexit debates may recall that the EU only offers a fixed number of external relationships — and Canada currently has the same deal as the UK (except with more maple syrup).

Nor is full Canadian EU membership possible, since membership is limited to European countries only. The 10 member states that refused to ratify the Ceta trade deal will almost certainly not ratify that EU-Canada association agreement. So what are Carney and von der Leyen even discussing? 

There are ironies here too. I found it deeply comic when I recently heard Carney speaking about sending a special envoy to the EU to discuss co-operation on areas including AI and defense. There is practically no AI work going on in Europe — except for lots of people hyperventilating about US tech companies. Besides, Nato, the defense alliance that ties Canada and most EU countries together, already exists. In other words, there is absolutely nothing in this hot-air balloon of a “pact” that could not be had down here on Earth. (And no, you don’t need an alliance to relax restrictions on freedom of movement.)

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If the EU and Canada were really serious about safeguarding their waning global influence, perhaps they should start by addressing their joint dependencies on the US in a more strategic way. Canada and Europe both run large and sustained current-account surpluses against the US. The two nations have built industrial structures on the assumption that the Americans would forever tolerate the trade deficit and global imbalances that sustain them. Even in the highly unlikely scenario that Canada were to gain full EU membership, this would not reduce its dependence on the US for imported goods. 

On my list of the 10 most important initiatives the EU needs to take right now, in other words, a closer relationship with Canada doesn’t even feature. Instead, my top suggestions would be for the EU to reopen the closed diplomatic channels with Moscow to ensure that it plays a role in the governance of post-war Ukraine; to recognize the dangers of a financial crisis that over-indebted European countries like France have exposed themselves to; to ditch the anti-tech regulation and many other bureaucratic hurdles the EU has imposed on business in the last decade; and to create a fledgling capital-market union, so that Europe’s large pool of savings are channeled into domestic investments. I can think of many more ambitious things, but that would be a good start.  

Besides Canada’s “associate membership”, fast-tracking Ukrainian EU membership is the other delusion of European politics. The EU does not have the money for it. And Ukraine is moving further away from meeting the formal criteria for joining, sinking deeper and deeper into corruption. Neither von der Leyen nor Zelensky are doing the work to change things. Instead, they are content merely to act upon the world stage. And that’s what this is really about: acting. If only Musil were alive today: he would have a lot of fun with these characters without qualities, and their mystifying parallel universes.

Now that the noise has receded, it is a good time to listen. I am not hearing of a successful Ukrainian counteroffensive. What I am hearing instead is the thud of Russian jackboots marching deeper into the parts of the Donbas region of eastern Ukraine that Vladimir Putin does not yet control.   

Meanwhile, in the southwest of the Arabian Peninsula, the Houthis have taken control of the strategic port city of Mokha. The city lies just to the north of the Strait of Bab el-Mandeb, which connects the Red Sea to the Gulf of Aden and the Indian Ocean. So far, the Houthis have not been able to interdict shipping through the Strait, as Iran did in the Strait of Hormuz. But since capturing Mokha they have also seized Perim Island, in the middle of Bab el-Mandeb, putting them in a far stronger position to threaten passing ships. If they succeed in closing the Strait, Iran and its allies would control the main maritime bottlenecks of the Middle East. 

That spells economic peril for the West. Before the war, the vast majority of oil produced in the Arabian Peninsula traveled through the straits of Hormuz and Bab el-Mandeb. Right now, about 400,000 barrels of Saudi Arabian oil flow through Bab el-Mandeb per day, only a small fraction of production. And after the Houthis captured Mokha, the price of Brent crude, the international benchmark, is back to around $100 per barrel. This is not the short, sharp oil-price shock that the markets had anticipated when the Iran war started. Leon Panetta, who was director of the CIA under President Obama, now warns of a “forever war”, with no signs of it being resolved one way or the other.  

Economists and central bankers have neatly divided the economic consequences of the war into three scenarios: baseline, adverse and severe. I would describe the situation we are in today as adverse, heading towards severe.  

A crude oil price of $100 translates into higher prices for petrol, diesel, heating oil, kerosene and other downstream products. A severe winter could lead to heating gas shortages in Germany, for the country’s storage tanks are already at record-low levels. A $100 oil price is not one at which our Western economies function smoothly.  

It is a price, however, at which the Russian economy functions very well. And oil, ominously, is what links the two wars. The longer the war in Iran lasts, the greater the financial boost for Russia, whose main exports are oil and gas. As a result, an unwelcome scenario presents itself: the US loses its war against Iran, and Ukraine loses to Russia. 

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Most wars do not end in outright victories or defeats. My central expectation for both is a messy draw: some dirty deal that would leave Iran charging money for passage through the Strait, with Trump and his business associates getting a cut. For Ukraine, I would define a draw as Russia keeping its presently occupied territories and obtaining assurances that Ukraine will stay outside Nato. But the odds of a bad outcome, from a Western perspective, are shortening.  

For one, there is clearly a risk that other European countries might be drawn into the war — just as there is an escalation risk in the Middle East. The two wars could also fuse into a broader Eurasian conflict that acts as a proxy war between the US and China. 

And I doubt that the aging societies of Western Europe have the stomach for a sustained fight. These countries are having to borrow money to meet their defense spending targets. Nor do they have an excess of young men eager to fight the Russians in a war that could later involve the use of nuclear and chemical weapons. In the event of war, our massive wealth and income redistribution systems would have to be painfully cut back, with millions thrown into immediate poverty. 

It is easier, then, to send money to Ukraine without committing troops. Ukraine has received hundreds of billions of pounds in military and financial support from the West, but Russia has still managed to outspend it. Russia hit a short recession earlier this year but is now recovering, in part due to the rise in the oil price. 

At the same time, the US, and by extension Ukraine, is suffering from a shortage of interceptor missiles used to take down incoming missiles and drones. Despite its formidable military capabilities, the US is not geared up for a long war. Its weak link is the supply chain. The same is happening in Europe, where decades of running down defense spending have taken their toll.  

Britain has an army of 75,000 troops, a force so depleted that it could only “seize a small market town on a good day”. These are the immortal words of General Sir Richard Barrons, a former military commander and co-author of the UK’s recent defense review.  

So what makes us so certain we can stop Russia winning in Ukraine? The Russians, too, are brimming with confidence. They are so confident of victory right now that they are no longer even interested in peace talks. 

When Steve Witkoff, Donald Trump’s special envoy for peace missions, and Jared Kushner, Trump’s son-in-law, visited Vladimir Putin last week, it turned into a toe-curling embarrassment. Putin was happy to receive them and hear their sycophantic praise. But he did not appear in a hurry to cut a peace deal, and the commentary in the Russian media about the visit was caustic. Dmitry Drize, a political commentator at Kommersant FM, wrote: “The visit followed the standard formula — arrival, restaurant, reception in the Kremlin… One would really like to see something more.” 

We have clearly moved beyond the period of US-Russian rapprochement marked by the Anchorage summit between Trump and Putin in August last year. At the time, Russian elites fell over themselves in their praise for Trump. No longer. Putin has the look of a man who thinks he can win.  

He has miscalculated before and may do so again. His invasion of Ukraine in February 2022 was a shambles. But the Russian army regrouped, and Russia is today in a stronger position than its opponent.  

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For many in the West, though, the idea of a Russian victory is still too painful to contemplate. If we treat something as unthinkable, we do not think about it. But underestimating your enemy is exactly how you lose wars. Even after four and a half years, I do not understand the strategic objective of Western support for Ukraine. I am not questioning the principle, but I fail to see what exactly the intended purpose is in concrete strategic terms. 

One of the few in Europe who pretends to have a strategy is Radosław Sikorski, the Polish foreign minister. His words do not reassure me. He once defined the strategy as one of exhausting the enemy, much as the Allied Powers defeated Germany in World War I. But the situation today is not comparable. Russia has not hit critical energy shortages as Germany did back then. The idea that we would win an endurance contest against Putin when oil prices are high seems over-optimistic. 

Last week, Sikorski claimed in a separate interview that the EU economy is nine to 10 times larger than that of Russia. This is not merely a false statistic; it is a Napoleonic-scale misjudgment of the size of Russia. Measured in dollars, the EU is indeed much bigger. But because Russia has been cut out of the dollar markets, that’s not a smart way to look at relative size. The best way to compare ourselves with a country like Russia, China or Iran, especially for military purposes, is purchasing power — literal bang for the buck. On that metric, the EU is three times as large as Russia. And even that does not tell us what we need to know, because the EU is spending only a tiny proportion of its economic output on helping Ukraine, whereas Putin is spending a lot more.  

The military metrics tell no more flattering a story. The EU has 1.3 million active military personnel, approximately the same as Russia. But in terms of military production, Russia beats the EU hands down. For example, Russia produces 3.4 million large howitzer shells per year, substantially more than the EU’s projected annual capacity of two million. This is true for many other weapons categories as well.

Back in March, Trump said the White House expected the war to last for four or five weeks. But historians have seen that kind of delusion before. When Germany started World War I in August 1914, Kaiser Wilhelm confidently told his troops: “You will be home before the leaves have fallen from the trees.” Today’s equivalent is the assertion that Russia and Iran are easy to defeat because we are so much richer than them.

The bottom line is that Trump has no strategy for the Middle East, just as Europeans have no strategy for Ukraine. We are rich and creditworthy enough to keep supporting Ukraine and battle Iran a little longer. But in either case I struggle to see a path to victory, for we are not willing to put our money, and our troops, where our mouth is. 

Rather than predictions, let’s focus on what we know. The coming of AI is the biggest structural shift happening to the global economy right now. If the massive AI investments currently under way in the US succeed, the payoff for the world will be enormous. If they fail, we will go into recession. There is a scenario where they fail in the short-term but succeed in the long-run. Remember the dotcom bubble in the late Nineties? The bubble burst. Dotcom didn’t.

Big financial crises generally do not happen when the stock market falls, but when people and governments take on too much debt. The global financial crisis started with a subprime mortgage bubble. Today’s equivalent could be the rise in debt to fund the AI boom.

One of the few Wall Street insiders to predict the 2008 crash was Steve Eisman, who featured prominently in Michael Lewis’ book The Big Short, and who was portrayed by Steve Carell in the subsequent film. Eisman said in a recent podcast that he predicted Armageddon once in his life — but isn’t quite ready to do it again.

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That reluctance is probably wise. For if AI almost certainly is the most transformative technology since the invention of the steam engine, we don’t yet know when and how this transformation will happen, and whether it’ll justify the massive debts currently being accrued by the largest industry players.

The so-called hyperscalers — large tech companies that operate data centers and cloud-computing infrastructure — are estimated to incur capital expenditures in the region of $600-800 billion in the US alone this year. Eisman notes that 70% of hyperscaler AI revenue comes from only two companies, OpenAI and Anthropic. This pair accounts for around a third of the hyperscalers’ entire cloud computing revenue, and though Anthropic is on a roll right now, OpenAI is currently undershooting revenue forecasts. More worryingly, Sam Altman’s firm has suffered an exodus of senior staff, a sign, perhaps, that something is going seriously wrong. Certainly, if any of the big AI companies were to go bankrupt, this could unleash a chain reaction of defaults.

Global financial crises are always caused by chain reactions; the Great Depression and the global financial crisis were both chain reactions within the banking sector. What most of these crises also have in common is a sudden explosion in debt. The logic, however, does not go the other way: just because debt is rising, and stock prices go up, you cannot conclude that it will inevitably lead to a crisis. There are perfectly legitimate reasons for people to borrow money, and debt-funded investments that fuel future productivity gains are a good thing.

But if you believe this narrative, and I do myself, you have to watch out for things going the wrong way. After all, though the dotcom bubble had a solid underlying rationale — that the internet would give rise to very profitable businesses — the investors of that era were in too much of a hurry. Many of the companies that eventually succeeded had not yet been founded.

Whatever these challenges, the subprime crisis of the early 2000s was fundamentally different. It was, to be blunt, a scam from the outset. Banks gave people no-questions-asked teaser mortgages that the borrowers could not conceivably service once interest rates reset. Then banks repackaged the mortgages into financial products and sold them to naive investors, all with the collusion of the rating agencies. Once mortgage delinquency rose, most of those “triple-A” products became worthless.

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Those varied histories explain what happened next. When the dotcom bubble burst, recovery soon followed. When subprime exploded, however, it triggered a chain reaction throughout the world. This was infamously true in the eurozone: after US mortgage products turned into junk, banks found themselves sitting on billions worth of worthless products. Many got into financial difficulties. Governments bailed them out, but in smaller countries with large financial sectors, finance ministries overextended themselves. This is how the Greek sovereign crisis started, and how it spread to Spain, Portugal, and Ireland.

Today,  there is still a potential for global chain reactions — but the mechanisms would be different. Over the years, China and Germany have accumulated massive trade surpluses against the US. As a result, both countries have large investment stocks in American companies. If the AI bubble blew up, and if that resulted in a US government bailout of big tech, the combination could trigger falls in both global stock markets and the dollar’s exchange rate. This would be a double whammy for the Europeans: a strong euro would kill the continent’s export industry, while all those American investments would suddenly be worth far less.

Yet if this suggests any crisis would quickly cross the Atlantic, none of this tells us if a crash is actually coming. How, then, to answer this question?

One vital thing to reiterate is that the rationale underpinning the AI boom is fundamentally correct. AI matters not because ChatGPT can do our children’s homework — but because it can transform countless different industries. The fate of legal assistants suggests this is happening already, with AI promising to transform everything from finance to accountancy, perhaps even journalism. The automation inherent in these changes could encourage manufacturing productivity to skyrocket, making goods cheaper and leaving workers with more free time.

Another reason for optimism is how quickly AI models are improving. Anthropic’s Mythos model was deemed too dangerous for ordinary users and had to be neutered before it was released to the wider public. OpenAI released its latest model GPT 6.0 only a few days ago; I have not been able to test it yet, but the broad progression in quality has been astounding.

To be clear, I am not predicting a Panglossian utopia. Friction in the transition will be enormous. Yet I think that if an AI crash does happen, it wouldn’t be caused by AI as an idea, or even as an industry, but, rather like the dotcom crash of the Nineties, because of excessive optimism and unfortunate timing. With firms taking on so much debt, the risk is that they’d be forced to repay before their investments started paying off. Another risk, for Wall Street anyway, is that China’s open-source software ends up overtaking the top US companies.

So even if the big picture story of an AI-led productivity boom is correct, the investment story is more complicated. We can have both — AI as a life-transforming technology, and an AI bubble that triggers a toxic chain reaction in financial markets. The single biggest node here would be the American government. The rise in US debt to the symbolic benchmark of $40 trillion should give us all pause for thought. If the US economy were to continue to grow at 2-3% as it has done in the past, all would be fine. Contrary to forecasts, Donald Trump did not crash the economy. Yet he is piling on a ton of debt, and if the AI bubble bursts, and the US economy falls into recession, those levels would suddenly look dodgy.

And if Eisman is getting nervous, so too are some of the world’s top investors. The Norwegian sovereign wealth fund, for instance, which is still the world’s largest, says it wants to diversify its government-bond portfolio away from the US. That should be a warning sign for the rest of us, especially given the way government and private debt can fuse during a financial chain reaction.

This is how it might start. First, a large AI company gets into trouble. So do several large investors. The US government then comes under pressure to bail out the financial sector, but has already accrued too much debt itself. At this point, the Federal Reserve steps in to buy US government debt and cut interest rates. Inflation duly rises further, the dollar crashes — and the crisis spreads to the rest of the world.

But remember: what goes for the stocks markets that predicted nine of the last five recessions also goes for columnists and financial experts. Our ability to predict financial crises is not great. But what we can do, at least, is prepare for one. And the time has come, I think, to do just that.

Based on the information we have, the most plausible explanation for the visit is that Ratcliffe and his Russian counterparts were discussing de-escalation. If Russia’s war against Ukraine were to turn into a broader European war, it would pose a vast security risk to the entire world.

What the US and Russia have in common is that they are both already fighting wars. Vladimir Putin and Donald Trump clearly do not wish to go to war with each other. There are reports that Putin may be planning a large autumn offensive in Ukraine. Russian troops are currently making slow but steady progress towards the Donbas cities of Kramatorsk and Sloviansk. It is quite plausible that Putin could step up this war — but for this he would need to recruit more troops and intensify his attacks on Ukrainian infrastructure. Some Western security officials are convinced that once Putin is done with Ukraine, he will try to test Nato’s cohesion.

I struggle to see what purpose this could possibly serve. If he really wanted to test Nato’s resolve, by far the best way would be to escalate the hybrid warfare that is already going on. One of the more serious recent incidents was a military drone flying into the wing of a parked Ukrainian cargo aircraft at Leipzig airport in early August. Attached to the drone was 600g of Semtex explosives, which did not detonate because of a malfunction. At the time there were several drone sightings in Germany. However, military leaders tend to underestimate hybrid warfare, even though it can easily morph into a conventional war.

Another escalation scenario is disagreement on what constitutes legitimate European support for Ukraine. International diplomacy has its rules on this that everybody including the Russians pretend to accept: if you support a party in a war financially, or with defensive weapons, you are not deemed to be participating in the war. If you take part in maneuvers, you are considered a party of the war. The supply of offensive weapons falls into a gray zone. Nato has gone to great lengths to steer clear of that zone. The Western European countries that support Ukraine also made it clear that they did not wish to participate in the war.

But beware of the gray zones. The issue is not who is right and who is wrong. Wars are not settled by fact-checkers in broadcasting companies. The issue is disagreement itself.

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Another gray-zone matter is the raids by Western countries of Russian ships or vessels that transport goods from Russia. The same goes for the supply of British drones for Ukrainian attacks inside Russia. Russia has responded with outrage to Prime Minister Andy Burnham’s decision to provide Ukraine with technical blueprints that would enable Ukraine to manufacture the Franco-British Storm Shadow cruise missiles. This prompted Putin’s spokesman to declare Britain to be a participant in the war. This is how escalation starts.

There is an awful lot of stuff going on that could blow up in our faces. The US economist Branko Milanović wrote an essay last week in which he described a very plausible escalation scenario. He writes the thirst for war is palpable in the Nordic and Baltic countries and is also growing in the UK and Germany. “The role of small countries—that through their geopolitical irresponsibility can wreck great damage to the world—tends to pass under the radar,” he writes. “The Nordic-Baltic coalition is essentially calling for a war with Russia, citing its own fears and traumas of Russian/Soviet control and occupation.”

I agree with his assessment. If I listen to assorted Finnish and Baltic politicians, it feels to me like 1914, the year when Germany started the First World War in a mood of euphoria. The person who sets the tone in European foreign policy right now is Kaja Kallas, a former Estonian prime minister who is now the EU’s high representative for foreign and security policy. I see her as the European warmonger-in-chief. 

The job of diplomacy is to find solutions to problems. This is a tough job. You keep your diplomatic back channels open and talk to the enemy. But the EU has cut off all diplomatic channels with Russia. EU countries have their ambassadors in Moscow, and they all reiterate the official lines they are given.

The US, meanwhile, has maintained diplomatic relationships with Russia. The Ratcliffe-Russia meeting makes it clear that these exist at several levels, including that of intelligence chiefs. The officials in charge of nuclear policy also talk to each other. Henry Kissinger maintained a strong diplomatic back channel with the Soviet ambassador to the US during the Nixon administration.

The reason why a war with Russia is so dangerous is the presence of nuclear, chemical and biological weapons. Russia has an estimated total inventory of over 5,400 nuclear warheads. France has 290 and Britain has 225. Given the vast size of Russia, the French nuclear arsenal could make 0.1% of the Russian territory uninhabitable. The Russian nuclear arsenal could completely destroy all of Western Europe, and still have a lot of missiles left. This is not a war Europe can win.

If Putin were to launch an unprovoked attack on a Nato country, the picture would be different. This would draw in the Americans. I assume that Ratcliffe would have taken the opportunity to clarify the US position and possibly contradict statements from some administration officials that Europe is now in charge of its own security and that the US would not directly intervene in case of a war.

The big European countries, meanwhile, are following the lead of the war-mongering minions because they have no plan B. If the war in Ukraine were to end, they would have to provide security guarantees. They would have to integrate Ukraine into the EU at an enormous cost. Only last week, Germany and five other EU countries announced that they would cut the EU budget by several hundred billion euros. This is Germany not putting its money where its mouth is.

Rhetorical escalation often precedes physical escalation, often triggered by a particular event — like the assassination of Franz Ferdinand in 1914. One such foreseeable event would be the seizure of Russian assets held in Europe, which amount to around €200 billion. People have gone to war over much less.

The Europeans already tried to seize the money at an EU summit last December. They failed. Most of the money lies at Euroclear, a large bank depository and clearing house in Brussels. If the EU had seized it, Belgium would have been legally liable in the case of litigation in foreign courts. Belgium is a very small country with a very large bank — a bad combination. Back in December, Bart De Wever, Belgium’s prime minister, demanded robust risk-sharing guarantees by the other EU members. They refused because they did not want to put themselves at risk of another financial crisis.

But if the EU is good at one thing, it is coming up with technical solutions to complex problems. They could attempt to develop a hideously complex financial instrument, similar to the subprime loans that gave rise to the global financial crisis 20 years ago. There is only ever one purpose behind such financial instruments — to hide risk, and lure naive investors into making unwise decisions. The same logic applies here. National parliaments would have to sign up to any risk-sharing deal, but they might be fooled into thinking that the risk is well controlled.

I have no idea how likely such a scenario is. All I am saying is that the sequestration of Russian assets is once again under discussion. If it were to happen, I would attach a high probability that it would trigger a dramatic Russian response.

It is, of course, entirely possible that Ratcliffe and his Russian counterparts spoke about something entirely different: Iran. But Russian support for Iran is not the critical factor in the Gulf War right now. Trump has clearly found himself in a predicament in Iran. He cannot afford another conflict. Therefore, an attempt to de-escalate tensions with Moscow seems like the most plausible explanation of the Ratcliffe-Russia meeting. A war is in nobody’s interest, least of all Europe’s. European countries are simply not prepared; de-escalation is the only rational strategy.

The problem is that escalation is not by definition a rational thing. The fact that something is in nobody’s interest does not mean that it is not going to happen. History is littered with examples of irrational wars and, lest we forget, the biggest ones were mostly Europeans.

The bombing of the Nord Stream pipelines — which had up until then supplied Germany with cheap Russian gas — revealed an aspect of Ukraine’s military defense strategy that had previously been hidden. It became clear that the Ukrainians were seeking to break up the Russian-German relationship, which they saw as a direct threat to their own security.

The first of the Nord Stream criminal trials will start on 26 October in Hamburg. It will expose many unsavory details. The prosecutors might ask questions such as: who ordered the attacks? What did President Volodymyr Zelensky know? When did he know it? The attack left Germany in a perma-energy crisis. And while I don’t think the trial will affect Germany’s support for Ukraine in the short run, it could — depending on what is revealed — make Germany more reluctant to support Ukraine’s membership of the EU and Nato in the future.

The pipeline explosions have a long pre-history. Germany’s energy relationship with Russia dates back to the Seventies. Gerhard Schröder, a former German chancellor and personal friend of Vladimir Putin, supercharged this relationship when he proposed the Baltic Sea pipeline projects in the early 2000s. The project later became known as Nord Stream. The first pipeline, which became operational in 2011, ran from near St Petersburg in Russia to Mecklenburg-Vorpommern in eastern Germany. Before Russia’s invasion of Ukraine, Nord Stream 1 provided Germany with 55% of its gas supplies. Nord Stream 2, which was only completed in 2021, had the capacity to increase the gas flows substantially.

The Germans treated their business dealings with Russia as separate from geopolitics. The standard answer you got from German officials before the war was that the best way to foster democracy in Russia was through trade. They called it Wandel durch Handel — change through trade. If it rhymes, it must be true.

Eastern European countries, notably Poland, treated the Nord Stream pipelines as a security threat. If Germany made itself dependent on Russia for its gas, Poland would once again be surrounded by a hostile alliance. Later, France joined the group of critics. More importantly, the US Congress passed successive acts, supported by both Democrats and Republicans, to impose sanctions on Germans involved in the pipeline project. They did not go after Schröder personally. He was the supervisory board chairman of the project. But they went after Matthias Warnig, the Nord Stream CEO. Warnig was a former East German Stasi officer and another close friend of Putin. The pipeline diplomacy became particularly heated in the two years leading up to Russia’s invasion in February 2022. I myself criticized the pipelines on the grounds that they made Germany dependent on Russian gas and undermined European solidarity. At that time, virtually nobody in Germany thought about energy in geopolitical terms — but everybody else did.

A few days before Putin invaded Ukraine, the German government agreed to suspend the Nord Stream 2 pipeline, which by then had been constructed but not yet used. It still needed certification. When Putin invaded, the project died. But Nord Stream 1, the older pipeline, was still operational. Even the Green Party, the only big German party that opposed the construction of Nord Stream 2, favored the continued operation of Nord Stream 1. By that time, the Greens were responsible for energy policy in the German government. As Germany was phasing out nuclear energy and coal, the country had no alternative to gas. Even when most of their energy was coming from renewable sources, they still needed gas to cover periods when there would be no wind and no sun.

There were alternative gas suppliers back then. The US and Qatar, for instance, sold gas in liquefied form (LNG) — but during this period, Germany did not have the infrastructure in place to process it. Russia’s gas, meanwhile, was pumped directly into the gas grid.

Each of the pipelines, the old Nord Stream 1 and the new Nord Stream 2, consisted of two big tubes. On 26 September 2022, three of the four tubes exploded near the Danish island of Bornholm, including the two that made up Nord Stream 1. Initially, everybody suspected the Russians. Then the US journalist Seymour Hersh wrote an article claiming that the explosion came at the behest of the CIA.

The German prosecutor eventually established that the attack was launched from a sailing yacht chartered in Germany by a group of Ukrainian citizens, with links to the Ukrainian army and secret service. Initially, the Ukrainian government tried to deflect attention from this evidence, arguing that the plot was funded by a wealthy private individual. But that story has since been debunked.

The operatives were highly trained explosives experts and deep-sea divers. The pipelines were located 80 meters below sea level. Diving that deep is not something you learn at your local scuba-diving club. The German prosecutor established that this was a military operation through and through. The estimated physical weight of the C4 explosives used to detonate the pipelines was in the order of 50-100 kilograms. Only governments have explosives on this scale.

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The German prosecutor issued a European Arrest Warrant for the operatives. The first successful arrest came in August last year, when Italian police detained Serhiy Kuznetsov, the suspected ringleader of the operation, who carelessly went on holiday to Italy. He was extradited to Germany and placed in a high-security prison. His trial is due to start this autumn.

What confuses me is why Kuznetsov thought it safe to go on holiday in the EU. Even more astonishing is the fact that the second suspect, Volodymyr Zhuravlev, whom the Polish authorities previously refused to extradite, also thought it safe to go on holiday abroad. Last week, the Croatian police arrested him. He is now awaiting extradition to Germany. This is one aspect of the story that I find puzzling. These are highly trained operatives with fake passports. Why would they go on holiday in unsafe locations?

So far, this all makes for a gripping spy story. But it may soon become a political one. Details will matter. The Wall Street Journal journalist Bojan Pancevski claims in his book, The Nord Stream Conspiracy, that the attack was orchestrated by the Ukrainian military and intelligence network, and that Valerii Zaluzhnyi, then commander-in-chief of the Ukrainian armed forces and now Ukrainian ambassador to the UK, was the most senior officer involved. We don’t know whether Zelensky gave the order or was informed. I don’t think it really matters. As president, he is responsible for the actions of his military and his intelligence service. What matters is that a Ukrainian commando sabotaged the critical energy infrastructure of a friendly country.

The media covered the pipeline explosions and the immediate aftermath half-heartedly. I suspect editors did not want to be accused of disseminating anti-Ukraine propaganda. The media supported Ukraine — and the pipeline story did not sit well with the hero worship of Zelensky. The German government also did not comment on the prosecutor’s action. But it’s worth remembering that both Olaf Scholz and Friedrich Merz could have stopped the investigation if they had wanted to. The Poles are outraged that they did not. Last week, Donald Tusk, the Polish prime minister, said that the bigger crime was the construction of the pipelines, not their destruction. I recall a tweet by the current Polish foreign minister, Radoslaw Sikorski, who was an MEP in Brussels at the time of the explosions. “Thank you, USA,” he wrote.

So, was it really a conspiracy? Over the course of my journalistic life, I’ve come to the conclusion that there are many fewer real conspiracies than most people think. What looks like a conspiracy is usually just a series of blunders. I think this was the case here too. A giant miscalculation by the Ukrainians. Back in the summer of 2022, they had pushed back the Russians. The war was going their way. Everybody wanted a photo with Zelensky. The Ukrainians thought it within their power to ensure that the Germans would not revert to their previously cozy relationship with the Russians. But after the Trump administration ended financial and most military support for Ukraine, Germany became Ukraine’s biggest supporter. What were the Ukrainians thinking?

However this story ends, I don’t expect Germany to revert to its old, naive pro-Russian reflexes. Germany will not make itself dependent on Russian gas once again. But I cannot exclude the possibility that Germany may, after the war has ended, reopen at least one of the pipelines. Germany has become reliant on natural gas — and Russia could become one of its several suppliers. We are one cold winter away from an energy crisis in Germany. And when that happens, we’ll remember who bombed the pipelines. Even without a winter crisis, I suspect that Germany’s future support for Ukraine will be less enthusiastic than it might otherwise have been.

The upcoming trial is going to release a lot of juicy information into the public domain. The media will cover it. The Alternative for Germany, the party of the far-Right, is already making a big deal out of the Nord Stream explosions. They are asking: why support a country that bombs our infrastructure? It is a hard question to answer. The German government, for sure, has not answered it.

The President may not have been serious about the lettuce tariff, but he is serious about tariffs in general. “Tariff,” he once said, “is the most beautiful word in the dictionary.” They are the one-size-fits-all economic policy tool of his administration.  

After he menaced Mexican salad, Trump turned his attention to a far more serious parasite — the EU, which he once described as having been created to “rip off America”. Again, he threatened new tariffs, only this time he was not joking. The trigger was a decision by the European Commission to impose two fines on Google totaling $1 billion. The Europeans accused Google of failing to comply with the Digital Markets Act, which forces US tech giants to open up their proprietary ecosystems to competition. Google was prioritizing its own search engine over others. This was not a one-off. The Europeans are messing heavily with the business models of lots of the US tech giants, not just Google. There is another European law, the Digital Services Act, which forces platforms like Facebook and X to moderate their social media content. 

All of this has wound up the American President. In retaliation, Trump wants to impose his new tariff on Europe “at the earliest possible moment”, arguing that the EU is robbing US companies of their legitimate profits. I don’t think this is a bluff. Unlike when he imposed his “Liberation Day” tariffs, existing US trade law allows him to do this. It could take up to a year, but this time US law will be on his side.  

When the US Supreme Court struck down Trump’s Liberation Day tariff regime in February, the Europeans got a bit overexcited. Some assumed it was a decision against tariffs in general. That was not the case. The Supreme Court declared the legal basis on which Trump had based his Liberation Day tariffs as null and void. But Trump has other legal avenues open to him. 

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Immediately after the ruling, the Trump administration made two decisions. The first was to implement a temporary regime that allowed the President to impose tariffs of up to 15%, no questions asked, for up to 150 days. That meant the old tariffs would continue for a few more months. That deadline has now expired. The second was to launch an investigation under Section 301 of the 1974 Trade Act against practically all countries in the world. The idea was to resurrect the old tariff regime — one for one — under a new legal cloak. 

Section 301 is a formal, tried-and-tested procedure. The actual investigation, however, was absurd. The US accused nearly every other country in the world of failing to match its own human rights standards with respect to imports of goods produced by forced labor. It is quite something to behold the US accusing Norway of not respecting the highest human rights standards. Rarely before has Section 301 been applied so cynically: the human rights accusations were just a front to resurrect the old, defunct tariff structure. 

Still, I believe it will pass the legal test anyway because of the separation of powers under US law. It is not the role of a court to decide whether a foreign trading practice is illegal. The courts decide whether the decision followed due process. 

From now on, Section 301 will be the legal basis for all of Trump’s tariff policies. That means if he wants to impose heavy tariffs on the EU in response to the fines on Google, he could do so — perfectly legally — by early next year. The EU may drag this out a bit, but I would be surprised if the US legal system ended up siding with the EU on this matter.  

When the Supreme Court ruled in February against the Liberation Day tariffs, the average US tariff was about 15%. It has come down a bit since but will now creep up again as the tariff regime hits. In the two-and-a-half years Trump has left in office, I expect average tariffs to rise to above 15%. Trump will always find ways to impose new tariffs, like the one he threatened last week.  

Have the tariffs made world trade any fairer? Have they contributed to a reduction in global trade imbalances? Absolutely not. But they are not without effect. The most important is that they are raising around $200-300 billion per year in revenue for the US Treasury. Tariffs are, formally, a tax on US consumers; but exporters from other countries are paying indirectly. The value of Japanese cars sold in the US fell by 24.7% in May last year, compared to the previous year. Yet the number of Japanese cars sold was down only by 3.9%. So the Japanese car companies took a hit on their profits.  

Companies that refused to cut export prices have seen a fall in sales. Among these are the Chinese online retailers Shein and Temu, both of which specialize in small items that were once exempt from tariffs. They could post their tiny packages to America because of the so-called de minimis rules — a tariff exemption for goods below a certain price. The week after Trump imposed his tariffs, and ended the de minimis exemptions, Shein observed a 23% fall in its US revenue compared with the preceding week. During the course of 2025, the Chinese trade surplus against the US fell by one third. 

So the tariffs did have an effect. But only on the bilateral US-China trade balance. Globally, trade imbalances are still rising. The Chinese have diverted trade from the US to the EU. As a result, the EU’s trade deficit with China increased dramatically. In first six months of this year, it was up by 23.9%.

The EU, in turn, is considering imitating Trump by imposing a tariff to protect European industries from Chinese competition. Remember the European outrage when Trump did this? Trump had a better case back then than the Europeans do now. The US runs a large trade deficit against the rest of the world, whereas the EU runs a persistent surplus. If the EU were to take a tougher stance on trade with China, I would expect China to react by cutting down on European imports and restricting sales to European companies whose supply chains depend on China. Last week, China extended the list of European companies earmarked for export controls to include Rheinmetall, the German defense producer. If we end up with a tit-for-tat trade war, the world will be worse off. 

Macroeconomists have long warned us not to focus on bilateral trade balances, but instead to think globally. Trump cares about nothing other than bilateral trade balances. It suits the dealmaker in him. But if we become like him, and the Chinese keep on doing what they have been doing, it will be a lose-lose game for the world. 

The EU would end up as the biggest loser of all. This is because the EU, like China, runs trade surpluses; as global trade falls, it will hit the surplus countries more than deficit countries. At the same time, the EU is reliant on Chinese imports for its supply chains, for example in the car industry. A trade war would be a double-whammy: tariffs on European products, and supply shortage of badly needed Chinese rare earths and semiconductors.

A year ago, Trump and Ursula von der Leyen, the European Commission president, agreed a trade deal at Trump’s golf retreat in Turnberry, Scotland. It was an embarrassing moment for von der Leyen, as the deal was entirely dictated by Trump. The EU agreed to cancel all the tariffs it had previously imposed on the US, including a 10% car tariff, and accepted that the US would impose a blanket 15% tariff on all imports from Europe, and a 50% tariff on steel and aluminum. If Trump ends up slapping a new Section 301 tariff on the EU, even that deal would be off. The tariffs would rise. The EU would retaliate. Everybody would be in a trade war.

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When one also takes into account the rise in oil prices resulting from Trump’s escalating war against Iran, as well as the rise in public debt throughout the West, it is not hard to imagine a global financial crisis resulting from this mess.   

During the Covid pandemic, Trump suggested that chloroquine phosphate — the anti-parasite medication used for fish tanks — could work against the Covid virus. (I wonder whether he had been watching My Big Fat Greek Wedding.) The President himself was wise enough not to take it, but others did. At least one man died. Tariffs are the chloroquine phosphate of the economic world, and they too come with serious side effects. 

I expect Trump will get away with it, again. That’s because the US is less integrated into Chinese-sourced supply chains than the EU, and it is better at absorbing shocks. My advice for trade officials, and chemistry buffs: don’t try this at home. Let Trump be Trump.  

When Bill Clinton got elected in 1992, a newspaper dispatched me to Washington, where I followed his first two years in office. He had a lucky break during the election campaign, but did not owe his victory and political success to that. This was the new era of post-communist financial globalization. Many of the smart people at the time were on the center-left of politics, and Clinton was their man. He was a reactionary on law and justice, but his welfare-to-work policies were inspiring. The center-left of Clinton’s generation saw welfare as an insurance policy, but also as a poverty trap. As a result, they pushed for people to get back into work. Clinton committed his own share of policy errors, like the deregulation of the financial industry. But he started off with an intelligent agenda.

Clinton was also a politician with a keen interest in macroeconomics. He was not an economist, but shortly after he got elected, he assembled a group of experts to help him draft his program for his time in the White House. His strategic goal was to reform welfare and the health system while at the same time eliminating the fiscal deficit.

Today, 34 years later, Andy Burnham will become Britain’s latest prime minister. What do we know about him? It is true that he did not have a lot of time to prepare his agenda. The time between a US presidential election to the inauguration is a little over two months — with a Christmas and New Year’s break in between. This is a little, but not much more, than the time between Burnham’s victory in the Makerfield by-election and his arrival at No. 10. Certainly, it does not take years to formulate an economic strategy.

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It is the implementation that takes longer. Clinton did not have it all worked out, but he set goals and intermediate targets, and developed a clear idea of the political and real-world obstacles that would stand in the way. Burnham has expressed a lot of ideas about British society. He has policies — but I’d struggle to identify an overarching strategic objective beyond the usual platitudes of social justice.

Burnham inherits a problem that his predecessors failed to address. Productivity growth in the UK collapsed directly after the global financial crisis in 2008 and never recovered. Until then, the City of London was the gift that kept on giving. In Germany, it was the car industry. One European country after another lost its business model. What happened in all of these countries, including the UK, is that more and more people become dependent on welfare. It became normal. Germany renamed its welfare program a “citizen’s income”, as though it were a basic human right. But the shift from welfare as an insurance policy to a welfare as a personal choice has trapped European societies in a vicious circle. The greater their welfare dependency became, the more they fell behind in investment and innovation.

Burnham has not given us any plan to fix this problem, let alone one I could disagree with. There are socialist ways of raising productivity growth, and libertarian ways. But let’s not get hung up on ideology. The fall in productivity growth is not about who gets what. It’s about investment, and most investment comes from the private sector. Companies invest to become more productive and innovative.

What does Burnham think about private-sector investment? I haven’t the foggiest, and nor does anyone else. I don’t get a sense that this is a question that keeps him up at night.

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He has, however, thought a lot about public-sector investment. But the two are not the same. About 80% of all investment in the UK is from the private sector. So if Burnham pushes ahead with his public investment plans by raising taxes, what I’d expect to see is a fall in private investment that exceeds the rise in public investment. It’s basic math.

Granted, we’d all like to have better trains. But fixing the trains has nothing to do with productivity. The US is a country with a terrible railway network, and with high private-sector productivity. France has Europe’s best railway system, but the trains have not stopped the French economy from becoming increasingly dysfunctional. Everybody needs to get to work, but the comfort and speed of the journey is at most marginally related to our productivity.

The productivity problem can only be solved through strategic action — just like Clinton addressed structural fiscal deficits and welfare dependence. Emmanuel Macron, too, was a welfare reformer, but he had no fiscal strategy. This is what has rendered his presidency a failure. A recent estimate from the French High Commission for Strategy and Planning found that France’s debt could rise from a current level of 118% of economic output to between 186% and 245% by 2050.

The center-left used to be good at strategy. Clinton was. So were Tony Blair and Gordon Brown. To be clear, I am not endorsing anyone here. This is not about whether we agree or disagree with their policies. My point is that these people had some strategy. But since Burnham has not told us what his strategy is, we can safely assume that he does not have one. Macron had one, but as I say it failed the fiscal test. This is a bit like going to war and being shocked that the enemy fights back, which is what happened when the US and Israel attacked Iran.

As for Starmer, he clearly was not a reformer, but at least Rachel Reeves imposed fiscal rules that kept the show on the road. But, again, have no clear idea where Burnham really stands on those rules. He said he would follow them, but this is easier said than done unless you have a clear idea of what to do when the numbers no longer add up.

So rather than leaking the names of Cabinet ministers, maybe Burnham should have told us about how he intends to fix the productivity problem while keeping the country solvent. At this point, we don’t need details. We need direction.

Burnham has lots of policies, for example on devolution. I am not against this. It is possible that local governments spend money more wisely than central government. The other way around is also possible. Either way, there is no link between the degree of decentralization and innovation. Silicon Valley is not where it is because of Californian politics. It is there because of Stanford University, and because some of its most brilliant entrepreneurs, like Steve Jobs, grew up there.

Burnham knows local politics better than most politicians do: and maybe it is easier to fix some problems locally. But it borders on delusional to think that you can draw lessons from the governance of Manchester for the UK as a whole. Cities don’t have bond markets, nor currencies that can devalue. And the mayor of Manchester does not have to put up with Donald Trump. The idea of a Northern No. 10 is a nice publicity stunt; but it is about appearances, not substance. I therefore make one specific and confident prediction: Burnham will not solve the UK’s underlying economic issues.

That said, he may still succeed politically. Elections, after all, are zero-sum games. Someone has to win. Starmer got his whopping majority not because he had a brilliant plan, but because people preferred his lack of a plan to the Tories’ version of a lack of plan.

Electoral success and problem-solving are not the same thing, of course. Margaret Thatcher would probably have lost the 1983 elections had it not been for the Falklands War. Angela Merkel managed to win four elections in a row and yet failed to address her country’s economic problems.

But the importance of problem-solving (or lack thereof) does not mean that you should keep ignoring the economy. The persistent failure of the previous generation to address the problems of a permanent decline in productivity has made European countries harder to govern. And the longer people are trapped in the welfare system, the harder it will be to get them out again. If you fail to solve a problem for long enough, eventually it catches up with you.

The odds of a successful Burnham premiership are shortening precisely because previous prime ministers have prioritized short-term expediency over long-term strategic action — and because it looks like he will do exactly the same. But we are already living in the long-term. The fact that politicians like Cameron or Johnson succeeded politically without solving the country’s deep-seated problems does not mean that the current generation of politicians will enjoy the same luxury.

In politics, as in football, outsiders can win, and favorites can lose. But we should not fool ourselves about Burnham. He does not have a strategy to fix the British economy. Those who are hoping he will do it by chance will be disappointed.

Donald Trump’s election victory in 2024 should have taught everyone that what has come to be known as “lawfare” — using legal processes to weaken political opponents — doesn’t work politically. But it seems few heeded the warning. Only last week, a similar attempt to bar Marine Le Pen from running in next year’s presidential elections failed after a French appeals court reduced the length of the ban. This is not the end of her legal battles, but it is certain now that she will be a candidate and her popularity remains undimmed.

There are other examples: in Romania, the supreme court banned the far-Right leader Călin Georgescu from taking part in the 2024 presidential elections. In Germany, the CDU wants to deprive Björn Höcke, one of the most high-profile politicians of the far-Right Alternative for Germany, of his fundamental right to vote and stand for elections. In the Netherlands, they went after Geert Wilders. It’s happening everywhere, again and again.

They have learned nothing. Trump bounced back from his legal battles and won the election. Le Pen will be a candidate. It is too early to make any predictions about the next French presidential election. But we can at this point safely conclude that the technocratic coup against Le Pen has failed. It will now be up to the voters to decide. This was not supposed to happen.

The case of Nigel Farage in the UK falls into the same category, though the details differ. Unlike Trump or Le Pen, the Reform UK leader faces neither criminal charges nor a police investigation. Instead, he was being investigated by the House of Commons Committee on Standards after breaching rules by failing to declare a gift. It would almost certainly have recommended a suspension which could have triggered a recall petition. If 10% of voters had signed it, a by-election would automatically have followed.

But by resigning his seat, Farage has short-circuited the procedure that could have led to his removal. If he wins, he may still face an investigation when he returns, though the House of Commons would, at that point, probably not be so stupid as to suspend him, if only to avoid the absurd spectacle of two by-elections in the same constituency within a few weeks of each other.

The media plays an important role in the political campaign against Farage. And its pursuit of Farage is deeply reminiscent of the one against Trump in the two years preceding the 2024 election. Ultimately, though, Trump walked away from his legal troubles and an assassin’s bullet. Farage walked away from a plane crash, and I suspect he will survive the slings and arrows of the British press as well as the onslaught of Count Binface’s jokes. British politics is full of entertaining stunts. But the idea that the Tory, Labour, Green and Lib Dem voters of Clacton will unite and support the bin man is absurd. What does it tell voters about how seriously politics is being taken by the establishment?

What, too, does it tell us about the media’s motivations? I suspect they’re mainly selfish ones. The legacy media owes its existence to closed-shop access arrangements such as the political lobby in the UK, or the White House press corps. In Germany, exclusive access to politicians is organized by a journalists’ club, which organizes all government press conferences. If Friedrich Merz wants to talk to the media, he has to knock on their door. And in the US, legacy media has been one of the biggest losers from the Trump administration. They lost their exclusive access to administration officials as the Trump administration opened up to bloggers and influencers.

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Populist leaders do not respect the press cartel. They are creatures of social media. If Farage were to become prime minister, he could decide to discard the political lobby altogether in Westminster. He could instruct his arts minister to allow foreign media organizations take control of UK newspapers and private broadcasters. Without much effort, he could finish them off in a single term. Even if British voters were to get rid of Farage after one term, his successors would almost surely not resurrect the old system. Even if a candidate of the Left in the US were to succeed Trump in early 2029, I would not expect that person to waste political capital on resurrecting long defunct journalist lobbies. Time moves on, and priorities change. No wonder the fourth estate is panicking.

And as consumers of news, we should speak out if the media pack is out for blood, or, as the Germans say, are chasing a pig through the village. This is what is happening to Farage. Sometimes it works: the media successfully got rid of Boris Johnson by persuading gullible Tory MPs to commit electoral suicide and ditch the leader who won them a landslide victory. They dispensed with Keir Starmer in similar circumstances.

I doubt, though, that the campaign against Farage will succeed, because Farage, unlike Johnson and Starmer before him, is in control of his party. His voters don’t care about politically constructed criminal cases or donations. They care about the things that affect them.

And they are right that many politicians simply don’t seem to care about the things that affect them. Yesterday’s men simply cling to mistakes of the past, refusing to learn from them. Hillary Clinton’s loss to Trump should have been a cautionary tale. Instead of pursuing him through the courts, the Democrats should have focused on their own campaign, and considered whether Joe Biden was fit to run while there was still an opportunity to find an alternative candidate. But no, the Democrats figured they had it in the bag — just as they did back in 2016. Overconfidence and wishful thinking play a big role in the demise of the center. I see the same mindset again in the UK campaign to rejoin the EU. The Rejoiners are clinging on to the same old failed strategies that sunk the Remain campaign — a false assessment of the economic significance of the single market.

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In Germany, the centrist parties that now want to ban the AfD should similarly reflect on why such attempts failed in the past. In 2017, the constitutional court struck what appeared to be a rock-solid case against the Right-wing extremist NPD. Unlike the centrists, though, the AfD learned from the episode and has taken precautions to protect itself against a ban. The chances of a ban are practically zero. And yet, the Left clings on to the same old failing ideas again and again.

Lack of reflection and critical self-examination has a become a defining characteristic of the political center worldwide. And all the while, the center-right, which has traditionally been stronger than the center-left in Europe, is losing support. By creating perma-coalitions with the center-left, they are driving more and more voters to the extremes. They do what they always did. Exactly as Talleyrand said.

The way to solve the political problem is to attempt to address the underlying problems such as deindustrialization and low productivity. Yet centrist policy agendas are full of displacement activities. So instead of focusing on fixing what lies beneath their broken economy, the British establishment is rooting for a man with a bin for a face. Should that strategy fail, if you want to dignify it with such a term, they might even resort to the ultimate, and most desperate, trick to keep Farage out of power — proportional representation. The experience of European countries has been that cynical changes in electoral systems backfire against those who initiate them. The simple reason is that voters, as a group, are not stupid.

Just as Talleyrand’s famous phrase described the failure of the House of Bourbon, it explains the demise of the age of multilateral globalization, the age that the EU represented so fittingly. Rather than confronting economic and political failures that have driven voters elsewhere, politicians simply return to their familiar tactics. Multilateralism is dying not because it was bound to fail, but because its proponents never learned, and never forgot.

And we all know what happened to the Bourbons.

The year of the 2018 World Cup also marked a turning point for the German economy. Until then, it was considered one the most successful in the world, a reputation it had enjoyed almost without interruption since the Second World War. I spent a lot of time back then warning that Germany’s strategy was not sustainable — even if it superficially seemed to work. From 1945 to 2018, after all, Germany was Europe’s manufacturing powerhouse. The last eight years, though, have been marked by deindustrialization, price spikes, and persistent economic disappointment.

In short, the parallels between the pitch and the boardroom are hard to miss. But there is one important difference: those in charge of German soccer are at least starting to act. They fired the coach, Julian Nagelsmann, and have started talking to Jürgen Klopp, probably the most famous German alive. The former coach of Liverpool and Borussia Dortmund wants to change the entire way the German national soccer is organized, and seems to have the backing of all the influential people in the country’s soccer establishment.

Alas, Friedrich Merz is no Klopp. He has difficulty tapping into the basic mood of the nation, let alone building a successful team. “What a game,” he tweeted blithely after the Nationalmannschaft lost to Paraguay on penalties last week. “With your commitment and team spirit at this World Cup you have thrilled our country.” Many Germans were left wondering whether their Chancellor had even been watching the same game. Welches Spiel (“which game”) soon trended on the country’s social media.

To be fair to Merz, he’s not so much the cause as the symptom — of a country that’s too old, too inflexible, too corporatist, too bureaucratic. There’s no one of Klopp’s caliber in German politics to speak truth to power, and put the economy on a different path. Besides, even if Klopp were to succeed in transforming the national team, it would take him some time to drag it back to its glory days. Achieving this for the German economy is incomparably harder.

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By Wolfgang Munchau

The biggest thing that happened to Germany in the last 40 years is that it’s turned from one of the most innovative countries on Earth into a nerve center of Luddism. Germans were the champions of 19th-century industrialization, during which their scientific discoveries and engineering breakthroughs, not least the invention of the motor car, transformed the world forever. These days, though, Germany is one of the least digitized advanced nations around.

Of course, Germany isn’t alone here. France is hardly a beacon of technological innovation either. Still, France is one of the very few European country with an AI foundation model, even if recent rankings put Mistral, the firm in question, between 50th and 100th place in global league tables. The UK is also doing comparatively well, thanks to Google’s Deep Mind and its offshoots, but can hardly compete with the Silicon Valley giants.

The frustrating thing here is that Germany should have had a particular interest in digital technologies. Certainly, the German car industry should be at the forefront of AI research: autonomous driving will become the big earner for the sector this century. But the world leaders in this segment are American, Chinese and Israeli. The Germans tried to develop their own systems, but they have not succeeded.

Germany’s decline is to a large extent a “typewriter-versus-computer” story. In other words: they bet on the wrong technology. Fax machines still rattle in German doctors’ offices, and the country’s broadband connections lag far behind its peers.

There are other reasons for German decline too. China has been pursuing an aggressive policy to build up its manufacturing capacity. And, until 10 years ago, these developments complemented Germany’s own industrial strategy. The Chinese made consumer goods, while the Germans sold them plant machinery. That has since changed. China is now competing head on with Germany in segments, like cars and chemicals, that used to be German specialties. Not that I’d blame China for Germany’s decline, which is due mostly due to its own complacency, arrogance, and resultant lack of investment.

That’s also the story in football. One of the team’s apparent problems was a lack of training — and too much leisure. The successful teams of previous generations spent much of their time locked in training bootcamps. This is not a football-specific issue, but reflects shifts across society at large. In a recent survey of advanced industrial nations, Germans had the lowest number of working hours per year: 1,331. The country with the highest, at 1,898, was Greece. Of course, this is contrary to how Germans perceive both themselves and others, but the old stereotypes of hard-nosed Teutons and feckless Southern Europeans no longer hold.

When nations, companies, or football teams decline, delusion and denial often play an important role. I was in Germany after the first match in the group stage of the World Cup, when they beat Curaçao 7-1. After the victory, most Germans thought they’d already won the trophy. Ahead of the second game against Cote d’Ivoire, a local radio station in North-Rhine Westphalia asked listeners to predict the score. Around 100 people took part in the poll, and every single respondent predicted victory, with many expecting a romp. Germany won the game in the end, but it was close — not the kind of victory that should have warranted such a high degree of certainty. Against Paraguay, the final game, one fan-site poll had 89% in favor of a German victory. The reason the shock of defeat was so profound was the same reason Germans think Greeks are lazy: ignorance and arrogance.

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Friedrich Merz: Europe’s Wormtongue

By Wolfgang Munchau

Finger-pointing is a natural first response to a shock. In the football, everyone blamed the coach. Lothar Matthäus, a former World Cup winner, blamed the wives. They were a distraction, apparently. But neither the wives, nor the coach, can explain the phenomenon of three consecutive failures.

Same in politics. Germany’s decline didn’t start recently. In 2024, I published Kaput, a book on the German economy, in which I argued that Germany’s primary problem was not cost competitiveness, but a lack of innovation and scale. There’s no exchange rate that can make a typewriter competitive again. By the same token, petrol cars are still being sold, but they are a declining product, with declining profit margins. What happened to industry, then, is what happened in football. The world changed, but Germany didn’t. Why would they, when they were still rich and comfortable? Germany has one of the world’s most generous welfare systems, but this also means that there’s less urgency when the economy tanks.

To be fair, Germany still has several highly specialized companies in areas like mechanical and chemical engineering. One of those is Zeiss, best known for its camera lenses, but which is now more focused on precision-optics for semiconductors. Another is Trumpf, which had humble origins as a machine-tool manufacturer, and which is now one of the world’s leaders in laser technology. Leica, the old-school camera maker, is still in business and very profitable, having found a niche at the very top end of the market.

But if there’s still excellence around, there’s less than before. Certainly, decline will continue for some years to come, as the car industry shrinks. They will still make cars in Germany, but they will be made in factories owned or operated by China. And just as German car companies re-circulated their profits into the German economy, the Chinese will do the same back home. Hardly a week goes by without another German car-component manufacturer registering for insolvency. All the while, Germany’s industrial sector will continue to shrink, and it won’t come back. Remember what happened to Detroit? That city’s on the mend now, but it’s taken decades, and Germany doesn’t have the relatively dynamic, decentralized politics of the US.

Coalitions, constitutional law, the EU — all these conspire against change. So too do Germany’s politicians. Angela Merkel never saw her role as solving problems, but she was at least a competent manager of politics. Her successor, Olaf Scholz, was also well briefed, but politically not very effective. Friedrich Merz, though, is the worst-briefed German chancellor at an EU level, and totally ineffective. His deputy, Lars Klingbeil, the co-chief of the SPD, is also a deeply unimpressive figure, whose political support in his own party is questionable. Apart from the parties of the hard Left and Right, then, the Federal Republic’s leadership is poor. If a system doesn’t allow to produce change, it doesn’t attract the best people.

For football, at least, there’s hope. Klopp has dragged things back before. But there are no Klopps in European politics, let alone Germany’s. This is where politics and football differ. National teams reinvent themselves from time to time. But Germany seems unable to. And, for now, its people don’t even have football to distract them.

I don’t believe that story, no matter how often it’s repeated. Starmer pulled off a number of remarkable coups over his short political career. Between 2016 and 2019, he changed Labour’s position from reluctantly backing Brexit to supporting a second referendum. Then he ruthlessly cleared Labour of his political opponents. That helped him win a landslide victory with only 34% of the vote. There are reasons why Starmer failed — but lack of political instinct isn’t one of them.

Bond markets, too, have stories. And not all of them are true or consistent either. After all, “bond vigilantes”, as bond market speculators are sometimes called, haven’t attacked France, a country with an even bigger public debt problem than the UK. France’s annual deficit, and its total stock of debt, are higher than Britain’s too, even as successive French governments have failed to stabilize public spending. So if France is safe, might it not be reasonable to think that the UK has a bit of headroom left too?

Unfortunately not. An attack on France would carry incalculable risks for the vigilantes. France is backed by the European Central Bank: an immensely powerful institution, with the ability to bail out countries of any size. I would hope this never happens. But I can’t rule it out, and the bond vigilantes can’t either. If you bet on a rise in French bond prices, and the ECB intervenes to lower them, a speculator could potentially face massive losses.

The UK obviously doesn’t have the protections that come with membership of a large monetary union. That’s precisely why the country needs a solid fiscal framework, as well as a rules-based central bank. And, here, Rachel Reeves’ fiscal rules have proved decent enough. They are certainly conservative, but importantly distinguish between current spending and long-term investment.

If, in other words, Andy Burnham and his next chancellor were to scrap Britain’s fiscal framework, the bond market vigilantes would have every incentive to attack. Jim O’Neill, a former Goldman Sachs chief economist and now an adviser to Burnham, has reportedly come out in favor of a German-style multi-annual public investment fund.  To make his idea palatable to the bond markets, O’Neill has suggested that the UK get rid of the pensions triple lock. I don’t think this will impress the vigilantes unless and until Burnham actually started freezing pensions — and that’s before you factor in the political challenges.

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By Wolfgang Munchau

Under the triple lock, pensions must increase by whichever’s highest: inflation, earnings growth, or 2.5%. This year, earnings came out top, informing the 4.8% jump in pensions. If Burnham were to cap pension increases at 2.5%, that may make an impression on the bond markets, but he’d also lose the support of many pensioners.

In other words, policy choices are difficult, and far beyond the triple lock too. Taxing property sounds fine, for instance, until you discover how many of your own voters would be paying the tax. Many Labour voters in the South of England own high-value properties. Reeves has already imposed a mansion tax on homes worth £2 million or more. If you slashed that to £1 million, you would invariably hit a lot of Labour voters in places like London, particularly when not everybody who is asset-rich is also income-rich.

To put it another way, there are no low-hanging fruits left to pick. Reeves and her Conservative predecessors have already stripped the orchard clean.

If you don’t want to cut military or welfare spending, and have no scope to raise borrowing, the only alternative left would be to raise taxes. But that doesn’t work either. A good example of how difficult it is to raise tax on high-income earners is the story of the UK’s now-abolished scheme for non-domiciled employees — the infamous “non-dom” regime. Classic non-domers used to be American investment bankers, seconded to the City of London for five or 10 years.

Successive Tory governments already scaled it down, and when Reeves came to office, she abolished the little that remained. But then she discovered that she lost out on tax revenues. Some foreign workers went home. Others went to Italy, which has successfully set up its own non-dom regime. Today, Milan is booming for that very reason.

This is what happens when your tax policies meet the complex reality of a world in which high-income earners are exceptionally mobile. Alas, Burnham and his team don’t live in this world. He may have been prepared for his power grab, but he hasn’t thought about the gritty details of economic policy.

Contrary to the stereotypes, Starmer and Reeves were prepared for power, economically speaking anyway. What they failed to do was translate a fiscal strategy into a political one. Traditionally, the Labour Party was the party of work. Rather than accepting the welfare state in its current unsustainable size, Starmer and Reeves could have framed their economic policy as a welfare-to-work program, with a strong emphasis on productive public-sector jobs. To that extent, their failure had nothing to do with day-to-day political nous — what they lacked was an overarching political agenda.

To be fair, Burnham has an agenda: just not a very inspiring one. Let’s go through some possible scenarios. He may do what I just suggested Starmer should have done: he might conclude that boosting Britain’s low productivity is key to winning the next election. Productivity is the money we earn per-hour-worked. It is a better metric than the more common statistic of gross domestic product, which conflates a lot of other stuff. GDP might go up because we work longer hours — or because of higher immigration.

But this does not make us feel better. Productivity is the better metric for politicians, too, because it explains how the median voter actually feels about the economy. The reason people are struggling to make ends meet, let alone afford to buy property, is closely related to the fall in productivity growth.

The one forecast I will make is that without a rebound in productivity growth, no prime minister can succeed. Even if he doesn’t have his own productivity agenda, Burnham may still be lucky. There are some tentative signs that productivity is rising again. For instance, payroll data shows an increase in output-per-hour to levels not seen since the financial crisis. But if that were to happen, Starmer, too, would have been lucky.

I am, however, struggling to see any scenario in which Burnham succeeds on the basis of what he is offering. Productivity doesn’t increase because railways are in public ownership, while higher taxes would actually impede productivity growth. There may be reasons to support more public-sector investment — but productivity is not one of them. If Burnham were to deliver his promises, indeed, the impact on productivity growth would be negative.

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Trump’s gamble with the West’s future

By Wolfgang Munchau

A smarter strategy would be old-school, Left-wing radicalism. I myself would hate it — but don’t let that get in the way of our discussion. A socialist with a brain might just do the following. You’d start by taking back control of the Bank of England and imposing a governor who supports your policies. The bond market vigilantes would get ready to attack immediately. But then you’d fight back, warning them you’re ready to default on all of Britain’s debt.

This is the “Kim Jong Un scenario”: a mad dictator with a few nuclear bombs is more powerful than a centrist people-pleaser with thousands. If the UK were to default on its debt, it would bring down the global financial system. The UK is not Argentina. It is too big to fail. So if you hold the nerve, and your MPs don’t panic and replace you in the meantime, you can dictate any deal you like. In practice, that might mean restructuring your debt, giving you breathing space on interest payments.

Back on Earth, though, we can all rest assured that none of this is going to happen because, as is increasingly clear from Burnham’s putative plan, the Leftists of our generation are mostly uninterested in economics, unlike their 20th-century predecessors.

In the Seventies, the Labour Party, and European social democratic parties, were focused on Keynesian economics. Gordon Brown, shortly after he became chancellor, famously talked about endogenous growth theory. Reeves and O’Neill may be trained economists, yet I’d struggle to identify any economic thinkers in the Labour Party today. Together with Germany’s SPD, and the French Socialists, the modern Left is focused primarily on income redistribution.

This leaves us with a scenario where Burnham might succeed because of luck, or where he fails. As so often in life, though, there are more ways to fail than succeed. My expectation is that in a year from now, Labour MPs will look in the mirror and ask: “what did we do?” And political journalists will have a neat narrative to explain why Burnham was always bound to fail.

It was none other than Karl Marx himself who made the sharpest observation of how history repeats itself. In his Eighteenth Brumaire of Louis Napoleon, he writes: “Hegel remarks somewhere that all great world-historic facts and personages appear, so to speak, twice. He forgot to add: the first time as tragedy, the second time as farce”. Marx was comparing the French emperor who had been dethroned after his defeat at Waterloo with his nephew, Napoleon III, a calamitous figure, who was King of France from 1852 until 1870.

Blair’s attempt at a comeback has a Napoleonic quality. Most commentary on his long essay focused on the man — his record in office and, especially, Iraq — and not on the arguments of the essay. A lot of people, especially on the Left, really hate him. But I think there is a bigger story here that is not about Blair himself, but about radical centrism itself.

He is right to say that “there are two epochal changes happening in the world today — one geopolitical, the other technological — and Britain is not prepared for either.” But he does not reflect on why this happened, and on his own role in that story.

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It’s time to bring back Blair

By Samuel Rubinstein

Blair was the most successful Labour prime minister in history, if you measure success in terms of the number of times he managed to get elected. But his big idea failed. He bequeathed a legacy of economic decline that his successors were not able to address with the classic tools of radical centrist policies — inward investment, trade agreements, privatization, deregulation and financialization.

The election of Emmanuel Macron in 2017 should serve as a more recent cautionary tale of what happens when countries naively try to revive radical centrism. In 2016, Macron suddenly appeared on the French political scene with his own version of radical centrism. He was elected president in 2017, and his new party gained a majority in the French parliament shortly afterwards. His government passed big reforms — the liberalization of labor markets; cuts in capital gains and corporation taxes; reforms in social security contribution systems; apprenticeship and vocational-training reform; railway reform, and so many others. It was one of the busiest legislative agendas that Europe’s ever seen, similar to what happened in the UK during Margaret Thatcher’s first term.

But then it stopped. Macron was re-elected in 2022, yet his party failed to win a majority in the following parliamentary elections. In 2024, he made a bad call to dissolve the parliament, as a result of which his party was almost eliminated.

There is a pattern here. In both France and the UK, radical centrism initially seemed to work and then at some point turned into a car crash. Radical centrism fails not because it’s wrong in theory, but because it’s wrong in practice. It simply cannot be delivered in a small European country, because it requires a diversified economy. That’s why the US could deliver it better than others. Radical centrism means that, if you live in an industrial town and your employer goes out of business, you can move to another part of the country and find another job. Or, if you train as an electrician, you may end up running an electricity company. Or, if Elon Musk fires you from your cosy government job, you can get yourself a food truck and retrain as a chef. Social and regional mobility plays a big part in this. This stuff does not happen in the UK or elsewhere in Europe, at least not on the scale that would be needed for radical centrism to work.

What killed radical centrism in the UK was financial globalization. The UK never recovered from the global financial crisis, because its economy remained dependent on the City of London. Because radical centrism requires a diversified economy, it is not a feasible political ideology for a mid-sized European country.

One could have imagined the EU developing in such a way to make radical centrism feasible. There was a time, in the early Nineties, when people thought of the EU and its single market as the future. I was among them. But reality intruded. My family and I moved around four European countries. So did many families — but most of them stayed where they were.

The barriers were not cultural, as euroskeptics lazily claim, but legal and institutional. Europeans have a long history of migration. The very rich and the very poor have always moved around. But what stopped middle-class employees moving around the EU were practical issues like incompatible pension systems. If you took up a new job abroad, you could lose insurance claims that you’d built up over many years. Another problem, one that affected families with children, was that of incompatible school curriculums. Europe’s private schools are ultra-compatible; if you are rich, Europe is a dream. But if you’re middle-class ,and you try to put your 10-year-old through a French or Belgian state school, you will have second thoughts. Language will be the least of your child’s problems.

The idea of the EU as a framework of radical centrism failed because it would have required a degree of political integration that EU leaders were simply not ready for. One of them was Blair himself. Blair is pro-European in terms of his stated preferences. He was anti-Brexit, even in favor of a second referendum. But his revealed preferences tell a different story. Memories are still fresh in the EU of how Blair divided the bloc over Iraq. He nurtured a narrative about a clash between the old Europe and the new Europe, of which he was the natural leader.

But for me, the decisive moment came much earlier. The most consequential stated preference by Blair was his decision during his premiership not to enter the euro. Initially, he had wanted to join it. I remember the moment when Blair briefly toyed with it but decided to fall into line with the position of Gordon Brown and Ed Balls, who strongly opposed euro membership on macroeconomic grounds. The macroeconomic arguments were indeed weighty. But to reduce the question to macroeconomics alone was to confuse the short-term and the long-term. This was a strategic mistake for Blair. Had he joined the Eurozone, then he might have been able to deliver radical centrism back in the UK.

The reason the euro decision was so important is that it killed the idea of an integrated European capital market. The EU still does not have one today. The lack of a big capital market is the reason why Europe does not have a large tech industry, whereas the US and China do. European banks are not big enough to fund companies the size of Google, Apple, Meta or Nvidia.

Back in the late Nineties, the UK was in a unique position to change that. It had the know-how. It had the financial center. It could have driven the financialization of the EU. But to build a capital market of the scale and importance of the US would have required a single currency and a single government bond market.

History took a different turn — and it won’t turn back. Today the EU has eight currencies, one of which is the euro. On top of this, we have the British pound, the Swiss Franc, and the Norwegian krone. Every country has its own sovereign bond markets, its own banks, and its own capital markets.

All the big European countries today suffer from similar problems to the UK — a fall in productivity growth from which they never recovered. All of them failed to connect with 21st-century technologies. They have bloated welfare states. They have not spent enough money on their security. Their most talented people emigrate. As Marx correctly predicted in his Eighteenth Brumaire, the political leaders in Europe are squarely in the category of what he called “grotesque mediocrity”.

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Why Europe keeps losing

By Wolfgang Munchau

Blair himself is of a different caliber. What I found refreshing about his essay is that at least somebody in the UK is talking about political ideas. The debate inside the Labour Party is reduced to personalities and popularity. Neither Keir Starmer, nor his presumptive challengers, have the slightest idea of what they want. At least Blair has a plan.

Sadly, it is just not a good plan. I concluded a long time ago that Britain’s problems are not solvable at a national level. I clung on to the hope — the delusion, you might call it — that the EU could develop into a political union capable of addressing this problem. That did not happen and now it will never happen. There are no obvious solutions to the problem.

It is difficult to imagine whether Marx, had he lived today, would still be a Marxist. It is not nearly so hard to imagine what he would have made of Blair and the radical centrists of our generation — tragic figures who turned into farcical ones in their own lifetimes.

Some of these spectators give the players and their team manager some really bad advice. They cheered Team EU when they were battling Donald Trump over his trade tariffs. I will never forget the headline in The Economist the week after Trump imposed his tariffs in April last year. Under the tag “Trade Fight Club”, the headline read: “The EU’s response to Donald Trump’s tariffs seems to work.”

What actually happened is that the EU, wisely, chose not to fight. Ursula von der Leyen famously caved in when she signed a humiliating trade deal after making a pilgrimage to the Trump Turnberry resort in Scotland three months later. The occasion was cringeworthy from start to end, including the obligatory thumbs-up group photo with Trump. But the EU delegation had no choice.

Six months later, the European Parliament briefly contemplated an insurrection, but stopped when it peeked over the cliff. In January, after Trump threatened to invade Greenland, and when the US Supreme Court declared Trump’s tariffs to be illegal, Brussels suspended the ratification of the EU-US trade deal. But after Trump threatened the German car industry with even higher tariffs, the MEPs, too, caved. Last week, they voted it through.

Right now, the EU trying to play a similar game with China, and is getting similarly bad advice.

The Europeans are angry about how China plays. Sabine Weyand, the EU’s outgoing director general for trade, compared the Chinese strategy to putting a stinking fish on the negotiating table. She was referring to new Chinese threats, like export controls on rare earths, or a ban of the sale of semiconductors to the EU. The EU is dependent on both. Whenever the EU tries to impose some retaliatory tariffs on China, that stinking fish returns to the table.

The EU has a point here. China’s economic policies are the biggest source of global economic imbalance right now. China’s exports are booming, but China represses domestic consumption. You can see this in EU-China trade data over recent years. Chinese exports to the EU have been going up, and Chinese imports from the EU are actually falling. And this year, it has all got dramatically worse. From January to April, China’s trade surplus with the EU went up by 26% compared to the same period in 2025. What happened is that US tariffs led China to divert some of its exports from the US to Europe.

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By Wolfgang Munchau

China’s currency, the yuan, does not float freely like the dollar, the euro or the pound. China keeps it steady against the dollar. When the dollar weakened against the euro after Trump came to office, so did the yuan. That means Chinese products are even cheaper than they were before. And European goods are even more expensive.

Kaja Kallas, the EU’s often-undiplomatic chief diplomat, likened Europe’s situation with China to that of a patient battling cancer. “If you have a very difficult disease, if you have a cancer, you have two choices. Either increase the morphine or you start chemotherapy.”

Europeans should be careful not to be too sanctimonious. This is essentially a barfight between two mercantilists. The EU has been playing the same game. During the euro crises of the last decade, the EU, too, devalued its currency and started to run large trade surpluses against the rest of the world. The EU’s lament has a certain “I stole it first” quality.

Right now, China is winning this trade war, just as Trump won his own trade war against the EU. The reason is the same in both cases. The EU is too dependent on both of them — on the US for defense, and on China for critical imports. The EU is not in a position to retaliate. This is not due to a lack of policy instruments. Some have never been used, like the “Anti-Coercion Instrument”, which would give the EU discretionary powers to retaliate against China without bureaucratic obstacles.

The reason the EU cannot do this is not just a matter of political division, or weakness, but because of economic dependencies. We caught a glimpse last week, when the EU did the very opposite of what its cheerleaders demanded. Rather than imposing new tariffs on China, it lifted them. As Bloomberg reported, the EU had previously imposed sanctions against Yangzhou Yangjie Electronic Technology, a semiconductor company, but decided to lift them after German car makers warned about supply chain chaos.

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Welcome to the age of uncertainty

By Wolfgang Munchau

This pattern keeps repeating itself. The Europeans really wanted to stick it to Trump. And to the Chinese too. But they could not do it, because the European car industry employs a reported 13.2 million people in the EU, according to data collected in 2022.

The seeds of this dependence were sown in the 2000s and 2010s. The European car industry, aiming to optimize its supply chains, committed the critical error of making itself reliant on China. As so often, Europe chose short-term gain over long-term resilience.

The first signs of stress became apparent during the pandemic, when the German car industry suffered an acute shortage of semiconductors from China. At the time, everybody was talking about supply chain diversification, but nothing much has happened. After the pandemic, industry returned to business as usual.

China has several other strangleholds in this sector. Car batteries are one example. This is a technology in which China is years ahead of the Europeans. China has an almost total monopoly for rare earth magnets, which are critical ingredients for all electric engines. Your windshield wipers would not work without them, nor would your F-35 fighter plane. Solar panels are another market that China has cornered.

The way many people think about globalization is antiquated. We no longer live in a world of factories that build goods from scratch, and from local products. Rather, modern trading relationships are a complex network. European-made cars are full of Chinese components. The bilateral trade balance that everybody gets so upset about does not tell you what you need to know. They do not capture these network effects and all their inter-dependencies. The important question is not how much China sells us, but how many Chinese imports are used in our exports to the rest of the world, and whether we have alternative suppliers. Measuring network effects is a technically complex task, as electrical engineers know only too well. The global economy is no less complicated than an electric network, and yet we are measuring it with the equivalent of an abacus.

Even Trump had to compromise over his tariffs against China, for the US was dependent on China for rare earths. Thanks to outsourcing, the US has a much smaller share of industry in its the economy than the EU does. Its industry is also less dependent on China for inputs, but its defense industries need rare earth products from the People’s Republic. The dependency goes both ways. China, too, is dependent on Western markets, of which the US and the EU are the largest.

The EU differs from the US only in that its inter-connection with other economies is stronger, and the cohesiveness among EU countries is weaker. You can have as many international trade economists, think-tankers, and journalists supporting Team EU as you wish. If Friedrich Merz and Giorgia Meloni turn up to a key summit and say no to tariffs, the game is over before it even started.  This is not a matter of political will, but one of economic reality; Merz or Meloni have no other choice.

Instead of hyperventilating about China or Trump, then, the EU would be better off solving its underlying problems of supply-chain dependence. Japan managed to reduce its dependence on China for rare earth, after Beijing imposed an export ban following a 2010 dispute over islands in the East China Sea. Instead of pondering yet another discriminatory trade instrument the EU will never use, why not chart out a binding 10-year plan to reduce supply dependencies?

The EU thought about this too, and came up with the Critical Raw Materials Act in 2024. In a report published last month, the European Court of Auditors said the regulation is well intended, but the implementation is lacking. Its devastating verdict was: “The targets established in the Act set the course for member states and for industry, but are non-binding, only cover strategic raw materials and lack justification.”

My advice would be to solve the problem, adopt strategic patience and ignore the hyperventilating fans. The football equivalent of a trade war for which you haven’t prepared is an offside trap gone wrong: all the players push forward, except for one who has second thoughts and suddenly stops.

Some people like to think that in football, the best team wins. We all know this not to be true. The winning team, rather, is the one that keeps their nerve under pressure.

This story does not start with the bond market, though it might end there, as it did for Liz Truss. The lesson of her short premiership is that when you walk through the doors of No. 10 for the first time as prime minister, you’d better be prepared and have a fully worked-out strategy. Keir Starmer and Rachel Reeves had a strategy. It wasn’t a great one, but they’d had time to develop it in Opposition. What they lacked was a plan B, ready to unroll when the external environment began to deteriorate.

Right now, Burnham is as unprepared as Truss. He has strong views about the economy, but he has not had time to develop a coherent strategy. A strategy is something you draw up, stress-test, gather opinion on, fine-tune, cost, and sell. This takes years. Burnham has not even started. Nor will he start any time soon because he will be fully focused on his campaign.

Compare this with the extraordinary time and effort Tony Blair and Gordon Brown invested in developing their economic strategy ahead of the 1997 election, or with Margaret Thatcher’s effort in the late Seventies. The economic success of the UK in the Eighties and early 2000s was built on hard work and hard thinking. Brown was probably the most formidable chancellor the UK has had in living memory, precisely because he did the math himself.

During the global financial crisis, something profound happened to the British economy, from which it never recovered. The rate of productivity growth slumped. Until then, the UK economic model had relied critically on the City of London. Finance was the gift that kept on giving. When that ended, financial regulation became stricter. Lending practices became more restrictive. Profit margins fell. A stream turned into a trickle. 

The UK has had seven prime ministers since Blair, but none of them has addressed the problem of low productivity growth. The economy bumbled along, but political disenchantment built up over the years, as became clear during the Brexit vote in 2016.

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By Aaron Bastani

After the Brexit referendum, I went through the UK’s economic statistics to see why people were so dissatisfied with the status quo. At first, I could not find anything in the official macroeconomic data; but eventually I did. It was an obscure statistic, published by the Department for Work and Pensions, on net disposable income, adjusted for inflation, and after housing costs. Essentially, this is what your wage buys after you have paid your taxes, your rent or mortgage. The lowest and the highest income groups did well in the period from 2007 until 2016. But the ones in the middle did really badly. That’s the median voter, the income group behind most electoral swings.

I recently looked at that same statistic again, now updated to 2025. The situation today is even more dramatic. While everyone above the average did moderately well, the incomes of households with lower and average income did really badly. The worst relative performer was the group that was just below the median income — technically the fourth decile in the income distribution. Their net income after housing costs was £23,500 in 2000. It was exactly the same last year: there had been no change. I would not be surprised if many of them were Reform voters.

There is an interesting quirk in these statistics: the situation was much, much worse in 2024, the year when Starmer was elected. During the first year of his government, the low-middle-income group saw a rise in net disposable income after housing costs by 5%. Given the context, this is as good as it gets. We don’t know what happened in Starmer’s second year because the data hasn’t yet been released. But as of now the Prime Minister can make a credible case that for low to medium income groups, the situation is improving. 

Brexit and the rise of the Reform party did not come out of the blue. Political dissatisfaction builds up over time. What made the politics of Britain’s post-2008 structural slump so much worse were unforced economic policy errors, such as quantitative easing, fiscal austerity, and Rishi Sunak’s excessive stimulus during the Covid years. The triple lock that keeps pensions rising at the minimum of inflation, average earnings, or 2.5%, is an inflationary Doomsday machine. When you have a price shock as bad as that which followed the Covid years, the last thing you want is to perpetuate pension increases.

At its heart, this is a macroeconomic policy crisis. Yet that doesn’t mean you have to revert to Thatcherism to solve it. There exist, in theory, plausible strategies on the Left. But they don’t exist in the Labour Party right now. 

What Burnham calls “Manchesterism” is the least plausible of all. Maybe we should call it Burnomics. This is basically the idea that what worked so well for Manchester will work for the UK. It is the very definition of a fallacy of composition: the generalization from a single example to the whole, from a city to a country. There’s a saying in America that all politics is local. That statement is true to a surprising extent, but it does not work the other way round. The main difference between a country and a large city is not size. It is macroeconomics: cities don’t have currencies, and they certainly don’t have bond markets. Becoming acquainted with the latter will be an entirely new experience for Burnham. 

The one substantial point on which Burnham differs from Starmer and Reeves is his idea of more flexible fiscal rules. This will be the test. In fiscal policy, “flexible” is always a euphemism for a higher debt. 

There are good and bad fiscal rules. The UK’s fiscal rules in the past were better than most. The EU’s system of fiscal rules, by contrast, has never really worked. The reason you need rules is to guide expectations, especially those of the bond markets. 

Burnham said last year that the UK needed “to get beyond this thing of being in hock to the bond markets”. You never heard that from Reeves. One of Burnham’s supporters, Paula Barker, Labour MP for Liverpool Wavertree, told Times Radio last week that once Burnham comes to power, “the markets will have to fall into line”, insisting that investors would be impressed by the new leader’s progressive policies.

It would be interesting to watch, albeit from a safe distance, what would happen if Barker’s proposition was put to a test. The bond markets are not political activists. They trade on available information. Contrary to rumors, they don’t always favor austerity. Bond investors were, for example, skeptical about Javier Milei’s fiscal shock therapy in Argentina because they did not think that it would be politically sustainable. 

If Burnham ended up raising Britain’s taxes and incurring a higher deficit to fund programs of public spending, the bond markets would almost surely question the sustainability of his strategy. They care about the economic program as a whole, not just the deficit itself. And Manchesterism is not a coherent package: it is a bunch of disconnected, virtue-signaling, progressive slogans. 

Reeves started by capping the deficit by following her fiscal rules and then worked out taxes and spending from there. When she did this, the Government invariably hit spending limits. It is possible to do it the other way round — letting the deficit fall where it may — and to succeed. But you would need to persuade a lot of people in business and in the bond markets that you have a viable growth strategy. Judging by the comments made by Barker, and by Burnham himself, that process has not even started.

If Burnham were to become prime minister, he would be the most unprepared premier since Truss. The smartest thing he can do in this situation is to betray his followers, double down on Starmer’s policies, and keep Reeves as his chancellor. That way, he would get the bond market vigilantes off his back. His supporters would hate it, but what can they do? Surely they’re not going to have another leadership contest?

There are worse scenarios. Like Truss, Burnham might pick the wrong advisers. He might want to let rip. He has got three years ahead of him, with a whopping parliamentary majority. That might be tempting. And that’s where our story ends: with the bond markets. 

This is not a prediction of what will happen: that decision depends on the whim of a single person, and I haven’t got the foggiest what’s going on in Trump’s head at any one moment. Yet set against his strategic options, the war could well expand.

What are those options? He could chicken out, declare victory, and hope that no one notices; keep the blockade going and see who blinks first; or resume military action. The latter is often dismissed on the grounds that Trump does not like war. And, certainly, his revealed preference is to secure a face-saving deal. He keeps dangling one in front of our faces, albeit possibly just to keep the markets happy. The problem is that such a deal is not available right now, and indeed may never be. The Americans cannot really walk away with Iran imposing tolls in the Strait of Hormuz, nor can they compromise on the fraught question of nuclear weapons.

The US naval blockade was America’s next big idea. But Iran has 3,662 miles of land borders, approximately the distance from Boston to Anchorage. Indeed, the US here arguably has the same problem as Western countries do issuing sanctions against Russia: the other side has long and porous borders. For all of Trump’s bluster, meanwhile, I’ve read credible reports that Iran has managed to break the US blockade and ship around a million barrels of oil per day to China, even as the Islamic Republic has established the “Persian Gulf Strait Authority” to collect tolls in the Strait of Hormuz.

As for the argument that the blockade will force Iran to the negotiating table, the truth is that, like Russia, Tehran is ready to endure hardship for far longer than we are. After all, the Revolutionary Guards do not have a mid-term election to worry about. This is why we should take the option of a resumption of military action more seriously than we currently do.

Of course, Trump hardly wants to risk Iran blowing up a US aircraft carrier. But, again, we should not be considering what he wants — but what choices he has in front of him. It is a logical fallacy to think that because it was wrong for the war to have started, the right course of action is to reverse it. If you have the capability to win the war, as the US does, the logical conclusion is the exact opposite. The least-bad option is to go all in, resume the war, with the explicit goal to destroy the Revolutionary Guard’s grip on power. I am not a military expert. Yet those who know more about these matters than I do tell me that in the case of Iran, this would require boots on the ground, a serious ground invasion. The scale would necessarily be enormous. Iran has 610,000 active soldiers, including the Revolutionary Guards. On top of this they have 350,000 reserves. Israel has 170,000 troops. A ground invasion would therefore necessarily involve hundreds of thousands of US soldiers, all of whom would first have to be mobilized, something that would take months.

The lack of other options aside, domestic politics might ultimately push Trump to embrace all this. If he TACOs, he’ll be seen as a loser in the eyes of his own supporters. The Trump presidency would be over — not literally, but politically. This would be the point of no return. Trump has survived scandals that would have finished off most other politicians, but lying about the economy is not in the same category as lying about war and peace. Recall that campaigned as the anti-war president. It’s a big deal to break that promise, and he’s already lost some supporters over it. But if he were to chicken out now, he would lose the remainder too. You cannot fool all of your supporters all of the time.

For its part, the MAGA base wouldn’t struggle to understand that the Iran nuclear deal — which Barack Obama agreed to and which Trump canceled during his first term — was superior to anything Trump would now have to sell as a diplomatic victory. Getting Iran to agree to international monitoring of its nuclear stockpile is exactly what the Iran nuclear deal did, in a framework more credible that what is likely to emerge now. As for allowing free passage through the Strait of Hormuz? That’s hardly a victory: the waterway was never closed before the war began. Even the best possible deal, from a US perspective, is inferior to anything they could have had — had they not gone to war.

Now consider the advice Trump will get. His political advisors and pollsters may tell him to cut his losses before the mid-term elections. The conventional wisdom is that Americans don’t like to pay $4.50 a gallon for gas. Yet even if the price of oil falls back to $3 by October — a big if — it’s unlikely that disappointed Republican supporters would forgive and forget. Voters care about the economy, but it’s not as mechanistic as that. If people believe that the removal of the Iranian regime were to bring about a permanently lower oil price, they might accept a short period of higher gas prices.

The old slogan — it’s about the economy stupid — is true, but not in a literal sense. It’s not so much about the economy as measured by official data. It’s about economic confidence, and Trump’s unique skill is to instill confidence in his supporters. I struggle, then, to see how a retreat from a war with Iran would boost this confidence. As long as the US is sure of winning the war eventually, both political and economic arguments should weigh against a premature exit.

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We should also not underestimate the advice Trump will get from advisors in the security apparatus, and indeed from Israel. We know from the New York Times that Benjamin Netanyahu played an instrumental role in getting Trump into the war. Marco Rubio, the secretary of state, and Vice President JD Vance, were both skeptical. The decisive argument that persuaded Trump was the idea that the costs of not acting would outweigh the costs of fighting. What has changed since is that the cost of the war is higher than Trump anticipated. But as I’ve explained, the cost of chickening out are higher still. Since the US is unlikely to achieve a military victory over Iran before November anyway, the President has only a few imperfect options left. A longer-term triumph over the Islamic Republic would destroy one of the most horrendous regimes on earth, a regime which imposes tolls on global shipping in defiance of international law, and which may one day develop nuclear weapons. A skillful communicator, which at his best Trump is, should not struggle to explain this.

The Europeans, of course, are advising Trump to end the war immediately. They were also the main diplomatic force behind the defunct Iran nuclear deal, which must now surely be seen as one of the great diplomatic achievements of modern times. But the Europeans have since lost their influence in the world, especially with the White House. As has become painfully clear over the last few years, Trump simply doesn’t care what they think.

Of course, a counter to my argument is that most wars don’t end with a decisive victory or defeat, but rather an armistice or a peace deal. Just look at the Ukraine war, the archetypal war of attrition. Russia is struggling hard to acquire new territory, but Ukraine is struggling too. And when it comes down to it, Russia has nuclear weapons and a vast theoretical reserve of men. We hear a lot of fairy tale stories about Ukraine regaining the initiative. When this war finally ends, however, it will be through a peace deal, not when a Ukrainian flag flies over the Kremlin.

Yet I am less sure that the Iran war will end this way. Unlike Russia, Iran is not a nuclear power, and on conventional forces alone the US surely has the military capability to theoretically defeat the regime. Whatever we might think about what is good or bad, right or wrong, it would therefore make sense for Trump to resume the war, and even to put boots on the ground if that is what’s required. It is what the logic of war dictates.

And yet, despite the EU’s best efforts, Trump still derides them, insults them, and threatens them. Most recently, he threatened to raise the tariff on European cars, from 15% to 25%. Most of them are German cars. He is disappointed with Keir Starmer and Giorgia Meloni. But he really hates the Germans. It seems personal.

I am not quite sure why this is the case. Maybe he hasn’t forgiven Angela Merkel for attempting to stand up to him during his first term. Maybe he’s trying to distance himself from his German ancestry. Or maybe it’s just Friedrich Merz. Merz is the Wormtongue of European politics. I wouldn’t trust him either.

After a year of Merz acting as the Trump appeaser-in-chief, the German chancellor suddenly turned on him last week. He said that Iran had humiliated the US, and that the US had entered the war without a strategy. On the substance, Merz was right, of course. I am always saying the same thing myself — along with virtually every other commentator. But Merz is also the head of government of western Europe’s largest country. He speaks for a large part of the EU and Nato too.

It’s hard to work out why he intervened as he did. My hunch is that Merz simply misjudged the situation, not for the first time. He made his comments during a visit to a class of school children in his idyllic Westphalian constituency, far away from the real world — somewhere he felt safe.

Unfortunately for Merz, though, Trump was listening and hit back immediately. It’s not Trump’s tweets I worry about. I have long ago stopped reading them. But what I do take seriously are Trump’s actions. The US Department of War, as it is now called, announced a reduction of troops in Germany by 5,000 — with Trump threatening still more.

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What I also take seriously is his threat to impose a 25% tariff on European cars. The US Supreme Court ruled earlier this year that Trump’s “Liberation Day” tariffs lacked a sound legal basis. But this has been widely and foolishly misinterpreted in the EU: it does not mean he cannot impose the tariffs; he just has to find a different legal basis. And for the cars, he has one. Cars, as well as steel and aluminum, fall under Section 232 of the 1962 Trade Expansion Act — a provision of national security. If the US-EU trade deal breaks down, the 25% on cars will come into force automatically. In fact, for cars, the actual tariff would actually be 27.5% because of an extant and perfectly legal tariff. And given how badly the German car industry is doing right now — with Porsche’s profits already collapsing by 98% — a 27.5% car tariff would be a major disaster.

Merz was the political driving force behind that Turnberry trade deal last August: the one in which Ursula von der Leyen agreed that the EU would drop all its tariffs against the US, even as America promised a 15% on all goods from the EU – including cars. For the EU as a whole, this was a terrible deal. But it was the best deal the German car industry could have hoped for.

Trump has defended his latest tariff increase on the grounds that the EU did not stick to its side of the bargain. This is not quite true, but the European Parliament did score an own goal when it delayed the ratification of the Turnberry deal after the US Supreme Court ruling. That delay has given Trump the excuse he needed to claim that the EU failed to honor its promises. Similarly, when European leaders declared that Iran “is not our war”, Trump could claim “Nato wasn’t there for us”. Merz’s comment about Trump’s humiliation is even more stupid. Trump hit back that Merz should “spend more time ending the war in Russia/Ukraine”, and that he should focus his attention on his “broken country”. Trump is objectively right on all of these points. The Germans are not involved in any Russia/Ukraine peace-making efforts. And most Germans would agree that their country is broken. It is also an objective fact that Nato clearly wasn’t for Trump when he asked. This is after all “not our war”.

Here, then, is the folly of what we are supposed to call European diplomacy in all its absurdity. Europe keeps provoking the President — and yet still depends on his country. Europeans, despite the nonsense they talk about strategic autonomy, have persistently failed to take the steps needed for Europe to be safe without the help of the US. The most important stumbling block being the lack of agreement between France and Germany on the future of the European defense. France sees itself as the senior partner; the Germans don’t. Nor is there any leadership from Italy, Spain or Poland. Domestic policies are all they care about. And when something happens that exposes their lack of preparedness and fragility, they resort to blame-gaming. They blame Vladimir Putin. They blame Viktor Orbán. Now they blame Trump.

If Europe really was serious about decoupling from the US, it would leave the eurosceptics like Orbán on the sidelines, muster a coalition of the willing, and draw up a multi-annual plan as it did for the euro in the Nineties. In stage zero, you would map out the road ahead. In stage one, you would pool your military procurement. In stage two, you adopt majority voting in the foreign affairs council. And in stage three, you begin to merge your militaries and elect or appoint a European commander-in-chief. As things stand, Europe can’t even manage to limp to stage zero. Contrast this inept alliance with what is happening in America. While I agree that Trump went into Iran without a strategy, he does not suffer from a collection action problem. He can rely on a formidable military apparatus. The Europeans don’t have a joint strategy, nor do they have the capabilities.

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There is absolutely no reason why Trump should care about European economic interests either. Economically, the European have the capacity to look after themselves. But they chose not to. And the war is going to hit Europe hard — the UK and Germany will suffer the worst effects with several decimal points knocked off economic growth. The car tariffs will be an additional hit on the German economy, costing it an estimated 0.3 points of growth. And neither the UK nor Germany is willing to undertake structural reforms to mitigate their disastrous economic situation.

The Europeans are in dangerous denial: struggling to admit their own powerlessness. And yet not so long ago, Europe was the center of the world’s political universe, the cradle of democracy and western culture. Today, though, the EU is the embarrassing uncle of western alliance, always there, drinking too much, talking too much, telling everybody what to do, and never, ever, buying a round.

Now Trump has called their bluff. No wonder they hate him.

The shoeshine boy of our age is the US soldier who placed a $400,000 wager on Polymarket, a betting exchange, ahead of the January capture of Venezuela’s President Nicolás Maduro. But the strangest story of all is one that most people have easily missed for it is hidden deep inside the financial pages. America’s Treasury Secretary Scott Bessent said that several Gulf States, including the United Arab Emirates, have requested dollar swap lines with the US. In a swap two parties agree to exchange something — in this case, US dollars for the UAE’s own currency, the dirham. A swap line would be an arrangement where UAE can trigger a swap at a moment’s notice.

But why would they want to do this? The UAE is very wealthy. The amount of dollars it already holds is more than 10 times the size of the US administration’s Exchange Stabilization Fund, which would be the counterparty to the swap. Gita Gopinath, a former deputy director and chief economist of the IMF, says this may indicate that “the consequences of the Iran conflict are far greater than what we see priced in markets. Such explorations do not arise lightly, even behind closed doors.”

Brad Setser, a fellow at the Council on Foreign Relations, writes that there is something radically new happening here. To him, it looks like a dodgy off-balance sheet transaction “with the Emirates getting the upside”.

Manipulation of betting markets and dodgy swaps are plausible tell-tale signs of a coming financial crisis. I do not know how the Iran war will end, but the diplomacy is more difficult than President Donald Trump pretends; this was illustrated over the weekend when the US President called off the planned trip to Pakistan by his envoys Steve Witkoff and Jared Kushner. A full diplomatic solution will take time to prepare and agree. Once agreed, it will take more time to put into place. This will take months. Even then, oil and gas prices will not drop back to where they were before because the war has caused permanent damage to infrastructure such as pipelines and processing facilities. Shipping and insurance companies will take time to assess when it will be safe to resume travel through the Strait of Hormuz.

If Iran were to receive any revenues from traffic through the strait, as Trump has suggested, that would set a costly precedent for the world economy — a tax on international shipping. Inspired by the Revolutionary Guards, the Indonesian finance minister, Purbaya Yudhi Sadewa, said his country, too, was considering imposing a toll on ships passing through the Strait of Malacca. This strait is even more important to the global economy than Hormuz. Approximately 40% of global trade passes through it.

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These measures would defy the United Nations Convention on the Law of the Sea, which establishes the principle that no state has sovereignty over the seas. If we gave up on this idea, it would be a leap back into the ages of pirates and gunboat diplomacy. We would not only be undoing the past 30 years of globalization but the last 200. Times would indeed be different if we went down that path.

We should not think for a moment that a quick and dirty peace deal, a US capitulation, would be the least bad outcome for the global economy. The biggest risk for the world economy is not a spike in oil prices, nor temporary shortages of urea and helium. Supply shocks are bad, but they are the kind of shocks for which you can prepare.

The bigger short-term risk would be a new global financial crisis, one that could be triggered not only by a long war, but also by a bad settlement. By that, I do not mean a collapse in stock markets as a primary driver of the crisis. If the blockade of the Strait of Hormuz were to lead to a global recession, it could unleash a whole sequence of crises in other parts of the financial sector, for sovereign private debt in particular. That’s why people like me, who follow global financial flows, are so spooked when they hear about the US/UAE conversations regarding a currency swap. If this were just a dodgy deal, that would probably be the most benign explanation. But it could also mean that they are preparing for a cardiac arrest in the global financial system. In this scenario, UAE banks might find it suddenly very difficult to borrow dollars; and in this case, a swap line would help keep the global financial system moving. But that system would be under extreme stress. And in this scenario, we would no longer be talking about the price of diesel or shortages of kerosene but about a Greater Depression. And, yes, stock prices would fall too. But that would be the least of our problems.

There is one big difference, though, between today and 2008. Back then, world leaders came together to fix the crisis. The Group of Twenty, until then a debating club of central bankers and finance ministers, held its first G20 summit at the level of heads of state and government in November 2008 in Washington. The Americans, the Russians, the Chinese and the Europeans were all sitting around a table, ready to set up new financial rules and agree a coordinated economic stimulus. For the first time, European leaders whose countries took part in the euro met as a distinct Eurozone. Our multilateral governance system was still intact then.

I have no nostalgia for those days. What the leaders decided back then worked in the short term but caused long-term damage to Western economies and democracies. Monetary quantitative easing and fiscal austerity were the most disastrous economic policy decisions anyone has taken this century. Both happened without democratic checks and balances. The reasons why the multilateralists got so upset about Brexit was that it was the first successful backlash against multilateralism.

So I am not mourning the passing of the age of multilateralism. But we have to understand the consequences of its passing. If the global economy went into a cardiac arrest, as it did in late 2008, we should not expect our politicians to come together as they did then and agree on a quick fix — or any fix. They will blame each other, as they do now. This new financial crisis will play out without proper intervention.

In such a world, one that has abandoned multilateralism, it will be more important than ever for the superpowers to exert strategic restraint. China looks superficially restrained politically, but its economic policies are beyond reckless. Indeed, China is by far the biggest contributor to global economic imbalances. And China may, at some unknown point in the future, launch a military attack on Taiwan.

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Vladimir Putin is no man of restraint either, and nor is Trump. We know that Trump is, by nature, an impulsive gambler. There is no chance that anyone would confuse him with a strategic actor. He clearly miscalculated when he ordered the attack on Iran. It would be a triumph of hope over experience if Trump were to embrace the idea of strategic patience going forward. Trump and his secretary of war, Pete Hegseth, have surrounded themselves with yes-men. There is nobody in the administration left willing to speak truth to power. Hegseth fired critical generals together with senior officials, most recently John Phelan, the secretary of the Navy. Trump has no permanent national security adviser. Mario Rubio, the secretary of state, fills this role part-time. We know that JD Vance was a war skeptic, but he is not going to stand up to Trump either.

The current generation of Europeans leaders are rules-based creatures, none more so than Prime Minister Keir Starmer. They are mourning the passing of the multilateral age. Strategic, long-term thinking is alien to them.

Amid the gloom, there is, however, one big potential upside. AI remains the optimists’ most plausible story, a rational reason for market valuations being as high as they are today. AI is potentially the most significant innovation since electricity. It could change the way we work and live more than any other technological innovations we have experienced in our lifetimes.

But the age-old rules of investment still apply. This time can only ever be different to the extent that AI will affect economic productivity growth. The effects of AI have only just started to show up in some economic figures in the US. I myself believe that AI will be a life-transforming technology. But we won’t know for sure for some time yet.

This, in turn, means that the spoils of AI will almost surely not arrive in time to save us from the folly of this war, and the commercial and financial havoc it will unleash. In that sense, this time will indeed be different, but not in a good way.

But what I can do — rather than offer a range of uncertain forecasts — is assess the range of plausible outcomes to this conflict and consider how each will affect countries and people in different ways. There’s no scientifically accurate way of eliminating uncertainty; so let’s embrace it. This is not a trivial exercise: I can recall only a few times in my own life when the range of possible geopolitical and economic outcomes, good or bad, has been as wild as it is today.

With his “known-unknowns” and “unknown-unknowns”, Donald Rumsfeld has actually provided us with a useful starting place to assess outcomes. The unknown-unknowns are often more important, but they are beyond our reach. “Whereof one cannot speak,” said Wittgenstein, “thereof one must be silent”. These are what economist Frank Knight was referring to when he coined the notion of “unquantifiable uncertainty”, or true uncertainty, as distinct from outcomes that carry a small probability.

So while little of value can be said about the unknown-unknowns, known-unknowns are generally worthy of deeper reflection. We all know about the truly bad scenarios stemming from the war. Airlines may run out of kerosene in six weeks; the world could run out of fertilizer and basic chemicals if the blockade continues for much longer. We know that Asia would be hit the hardest, followed by Europe, with the US affected least.

There are also potentially good outcomes. Europe has been offered a reminder that its investments in energy independence are worthwhile — and this includes both nuclear and renewables. The European Greens were mad to oppose nuclear power, but they were right about renewables, if only from the perspective of energy independence.

Beyond the war, which should end eventually, there are other positive economic scenarios coming down the track. The most interesting part of the latest World Economic Outlook by the International Monetary Fund was not the central forecast, the risk of global recession: but, rather, the wide range of possible scenarios it also weighed up. We truly live in a world of Knightian uncertainty.

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I’m talking here about plausible scenarios, those that have a reasonable chance of occurring: the known-unknowns. Of particular interest are those scenarios at the extreme ends of the spectrum. Some middle-of-the-road scenarios are plausible, of course: economic forecasters always use them for their forecasts. But they have no higher probability of occurring than the good or bad ones. What you really want is information about the spread of outcomes, not the average.

If you want to understand uncertainty, after all, the mean is your enemy. Politicians should care about the voter with the median income; the voter who, when income is ranked from poorest to richest, is sitting in the middle. He would be a different person from the man with the average income, because the super-rich distort the picture. It’s the “Bill Gates walks into the pub” problem, where a single billionaire raises the average income of a group.

There’s an old joke about the statistician who died crossing a river that was three foot deep on average. Real statisticians, of course, know about this stuff. The people most at risk of such misjudgments are those with a Statistics 101 background, who have been taught some powerful techniques they then unleash on an unsuspecting public: economists, journalists, doctors, epidemiologists and unfortunately also climate scientists.

One of the most catastrophic uses of averages is represented by the communication strategy of climate scientists, when, 10 years ago this week, they set a target to keep the increase in average global temperature to below 2°C. But what kills us is not the average temperature — the 2°C extra — but the extremes: floods, heat, forest fires.

These are the metrics the climate community should have communicated. When you’re told, after all, that the temperature is going to rise by a few degrees, you get the deckchairs out. Indeed, I heard one well-known political commentator claiming that it might be nice for the weather to be a little warmer in Northern Europe. When, on the other hand, you receive a flood warning, you get the sandbags out.

In short, how we communicate risk determines how we act, and misusing statistics inevitably leads to misjudgments.

So rather than making sweeping average claims about the future, whether about the climate or war with Iran, a better way of thinking about our planet in the medium term is by reflecting on how different plausible scenarios could affect regions in different ways.

The most important positive scenario we might consider is the AI-led productivity boom. It has not happened yet — but there are data points suggesting that it may be starting to happen. If it does, it would benefit the US a lot more than the rest of the world. After all, America invented the technology; Silicon Valley’s foundational AI models are ahead of everyone else’s; and the US’s AI infrastructure is far and away the global leader. China, for its part, is next in line. The People’s Republic may not have invented AI: but it was easily the most successful second mover.

Unsurprisingly, Europe will gain least from the AI revolution. The EU is still in data-protection mode, as much a function of its cultural stance as individual government policies. From LLMs to driverless vehicles, indeed, the Europeans have decoupled from most of our century’s cutting-edge technologies. Pharmaceuticals is the one important exception, but here too China is catching up fast. China also is ahead on renewable investments, but here, at least, the Europeans do better than the Americans.

When it comes to bad outcomes, then, Europe is at greater risk than its rivals. And I don’t just mean technologically. There is a plausible scenario that the war in Ukraine could spread, for instance to the Baltic states, and the US would almost certainly not come to Europe’s rescue. Donald Trump’s line about how the Europeans “weren’t there for us” when the US attacked Iran will keep ringing in our ears as the scenario of a European war grows — in my opinion, a non-trivial tail risk.

Similarly, the Iran ceasefire could break down and the violence spread across the Middle East. Yet while there’s a lot of uncertainty about all these scenarios, we can say with some confidence that there is no realistic scenario of war hitting America’s shores.

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Absent any definitive forecasts, from this brief analysis, I can make some sharp observations. First: the US is clearly in a better position than everyone else. Second: the US is more likely to benefit from any upside scenario, and less likely to be hit by a downside one. I’d therefore warn against those heralding the end of US global dominance, let alone the end of Trump’s presidency. This is mostly wishful thinking. The President has certainly made some foolish decisions, but the US is still at the head of the pack.

Things don’t look so rosy for Europe: it will not benefit from a global productivity boom and will be disproportionately exposed to the bad scenarios. And in those areas where it is strong, it is under attack by China. East and South East Asia sit somewhere in between the two polar opposites — beneficiaries of 21st-century technologies, but not as much as the US. But even though Asia is at greater risk of disruption from the blockade of the Strait of Hormuz, it is still more resilient to shocks than Europe.

Whatever happens, one single forecast, or even a focus on two or three scenarios, can’t hope to capture the deep asymmetry of the uncertainty we’re currently facing.

But people who embrace uncertainty don’t think in terms of baselines. They don’t look for polls or projections. Nor do they seek to control that uncertainty. They seek to learn from it. Perhaps we could all learn from them. Forecasts are for losers, and once you’re comfortable admitting that you just don’t know — you might end up seeing things more clearly.

It is hard to imagine today the degree of optimism everybody had about the war when Helmuth von Moltke, the German military commander, executed a version of the Schlieffen plan. Kaiser Wilhelm II told his soldiers: “You will be home before the leaves fall from the trees.” Young men left their jobs to go to the front. Older men, like the German sociologist Max Weber, lamented their inability to fight. In Britain, too, the general expectation was that the war would be “over by Christmas”. Trump predicted that the Iran war would last four to five weeks. We are now in week five.

Initially, in 1914, Germany’s war went according to plan. The Germans pushed through Belgium, encountering British forces near Mons, and then moved quickly over the border into France, pushing the French and British armies some 250km to the south. The Germans came within 40km of Paris. But the seeds of failure were already sown. They advanced, but they failed to surround the city. The quick encirclement – Schlieffen’s grand plan — did not happen.

As the Canadian historian Holger Herwig writes in The Marne 1914 about the Schlieffen plan: “It was a single roll of the dice. There was no fallback, no Plan B. Speed was critical; delay was death. Every available soldier, active or reserve, was deployed from the first day of mobilization. The sounds and sights of two million men trudging across Belgium and northeastern France with their kit, guns, and horses in sweltering 30-degree heat, stifling humidity and suffocating dust was stunning, and frightening.”

And herein lies the problem with grand strategy: it unravels on contact with the unexpected. Reality has a nasty habit of sabotaging even the most carefully laid plans. As Herwig tells it, the German troops were simply not prepared for the summer heat.

The Franco-British counter-offensive started on September 6 with the Battle of the Marne, the single most consequential battle of the First World War. Essentially, the Allied Forces managed to split the two German armies, the one that came from the north towards Paris, and the other further east. On September 9, the Germans began a general retreat, and by September 12 they had fallen back to the Aisne in the north. This was the beginning of the trench warfare that would dominate the Western Front for another four years. It ended with Germany’s total exhaustion, militarily and financially.

Historians have examined in great detail why Germany, the military and economic superpower of its time, lost the war. But the most important reason was apparent in those first six weeks: there was no plan B. The Schlieffen plan did not account for the weather. Nor did it consider what might happen if the war dragged on: acute supply difficulties.

Donald Trump, too, has no plan B. In fact, it’s hard to decipher if he ever had a plan A — whether it was toppling Iran’s government, weakening its nuclear capabilities or crushing its regional influence. Certainly, the American decapitation strategy succeeded at a purely technical level; Khamenei was killed in the opening strikes. But Trump’s bombardment underestimated the enemy, who was swift to escalate matters. Iran closed the Strait of Hormuz and attacked the Gulf states allied to the US and Israel. And it hit the US where it is most vulnerable: its reliance on the global economy and the global financial markets. I concluded a while ago that the West is so dependent on imported raw materials that it is not in a position to fight any substantial wars – with countries like Iran, Russia or China. So it is proving.

This was also the case for Germany in 1914: it was very strong, but also extremely vulnerable to supply shocks. Germany produced around 70% of its food domestically, and was dependent on imports for fertilizers and intermediate goods. It’s a familiar story. Today, the West is running into shortages of helium and urea, essential for the production of semiconductors and fertilizer respectively.  

This is something military planners, then and today, rarely have in their blueprints. Von Schlieffen and von Moltke were members of the aristocracy. They were focused on the big picture. They had little interest in the grubby business of mines and heavy industry. Similarly, the US military did not consider that there might be supply shortages for radars or interceptors. If the likes of Vladimir Putin and Xi Jinping have one advantage over us, it is that they understand raw materials and supply chains at a much deeper level than we do.

At the weekend, things escalated further. The Houthis, who control large parts of Yemen, entered the conflict with an attack on Israel. If the Houthis were to close the Bab el-Mandeb Strait, where the Red Sea passes through to the Gulf of Aden, the world would be on the verge of its biggest oil and supply-chain crisis ever. Around 30% of global container shipping passes through the Suez Canal.

There are also important differences to the First World War. But these are not necessarily comforting. Russia’s invasion of Ukraine in 2022 also started with a miscalculation leading to a long war of attrition that is yet to conclude. But unlike Germany in 1918, Russia is nowhere near the point of exhaustion — precisely because it has sounder supply chains.

Europeans have recently been framing the debate about their security solely in terms of the Russia-Ukraine war. They fear a Russian attack more than anything else. A far more immediate vulnerability, however, is their energy dependence. There are plausible scenarios of acute energy shortages ahead. The greater threat from China is not that it sells us cheap cars, but that it might stop selling us rare earth metals.

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Trump's war is Europe's problem

By Wolfgang Munchau

I always thought the Americans were strategically smarter than Europeans. That was indeed the case for the US-led postwar world order. But I didn’t factor in Donald Trump. He is clearly not a strategic global actor. And he is currently blowing up whatever goodwill he has in the Middle East on a war with no concrete goal or exit strategy. The best outcome right now would be one in which Iran agreed to reopen the Strait of Hormuz and not to pursue a nuclear program. But this is essentially a return to the status quo of 2015, when the Iran nuclear deal was agreed — probably Europe’s last foreign policy success story. As part of this deal, Iran accepted limits on its nuclear program, like a cut in its stockpiles of enriched uranium. It was Trump who left the accord.

If the goal of this war is to effect regime change, then, a ground invasion will be required. This may yet come to pass: the Pentagon is already preparing for such an eventuality. But to succeed, such an invasion would have to be of an order of magnitude bigger than Iraq. We are talking about First World War levels of troops. With reserves, Iran has around one million troops. If the US puts 10,000 “boots on the ground”, this is not going to result in regime change. And if, as is mooted, Trump were to invade Kharg Island in the Persian Gulf, Iran’s core oil export hub, the Iranian and the Houthis would hit back at oil and gas infrastructure elsewhere in the Middle East.

I am sure that US and Israeli strategists have more information available to them than even the best-informed commentators. But as the hard-fought experience of past wars shows, information does not prevent leaders from making mistakes.

Perhaps the single most important lesson of the First World War, then, is that you should not base your strategy on a single roll of a dice, as Herwig put it. Smart gamblers know that too. I always thought that, for all his many faults, Trump was a smart gambler. But in this war, which is far from over, the cards are stacked against him.

Nobody in the world is completely independent, but many countries are more robust than we are. Russia has proven resilient, shaking off Western sanctions, which should come as no surprise to anyone who knows the country. China, too, is clearly resilient. And the US is more than resilient. It is a country that thrives under adversity, very much in accordance with Nassim Nicholas Taleb’s notion of “Antifragility”.  Modern Europe, however, is most certainly not antifragile. With every shock, it weakens. After the Covid pandemic, the US reconnected with its pre-pandemic growth trajectory. The Europeans, mostly, did not. Our GDP settled at a level below its previous trajectory — growing at an increasingly lower rate.

It is now happening again. Only three weeks into the US-Iran war, European interest rates have risen and there are reports of gas shortages. Why are the European gas tanks almost empty? Why have the Europeans not built a large strategic oil reserve, like the US and China, or gas reserves lasting for several years?

The very essence of dependency is when you let others do your strategic thinking. In Niall Ferguson’s biography of Kissinger, the ex-secretary of state is quoted as saying back in 1966 that “the present system encourages too many of our allies to shift the costs and the responsibilities of the common defense to us”. This has been a theme in transatlantic relations ever since, as Europe’s culture of dependency expanded into other areas, including technology. It’s like a drug addiction that started out casual and harmless but eventually became destructive.

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The problem with political addictions, especially those that have been allowed to fester for decades, is that they become hard to reverse.  For example, Germany made itself dependent on Russia for its gas supplies for the two decades until Russia invaded Ukraine in 2022. It took a war to end it. At that point, the Germans switched towards gas from the US and Qatar and replaced one dependency with another. They are dependent on gas because they persisted in killing the only two energy sources they had: coal and nuclear. Yes, there is clearly a good environmental reason to phase out coal, but this wasn’t the right time. To end both coal and nuclear together, and to do so simultaneously, is hopping mad. Nobody understood nuclear engineering better than the Germans; they gave up on an important energy source, as well as a technology.

If you prioritize strategic independence, the right policy mix for European countries would be the kitchen-sink approach and do everything: nuclear, renewables, gas, and coal. If one goes, you still have the others. The idea that Europe, which is one of the least resource-rich places on earth, has a choice in this matter is delusional. The Europeans Greens were right about renewables, but they messed up by turning it into an ideological debate. So did the parties on the Right, who were anti-renewables. I think this is just as stupid.

Europe hasn’t just sacrificed its energy independence, but its military independence too. Our European armies are in a dreadful state. The decay cannot be adequately measured in terms of military spending as a proportion of GDP. The metric vastly understates the true extent of the dilapidated state of our armed forces. General Sir Richard Barrons, a former commander of Britain’s Joint Forces Command, said that the British Army, were it to act alone, “could seize one small market town on a good day”. I have heard similar comments from German Bundeswehr generals. They all agree they couldn’t fight Russia. When Europe spends on average 2% of its GDP on defense, and the US spends 3.5%, this does not even begin to tell you what’s really going on. If you measure it in terms of what security the money has bought, the gap is much bigger than the one between those two headline numbers.

Because of this, we cannot supply more weapons to Ukraine. We don’t have any left that we can discard without endangering our own security even further. Europe’s armed forces also fail to attract the right people. I know of someone who was rejected by the German army over a decade ago on the grounds that he was overqualified. Back then, the German army was a welfare program for unemployed young men. This was when Ursula von der Leyen was Germany’s defense minister. Today she is President of the European Commission,

The reason why we Europeans hyperventilate so much about Donald Trump is that he threatens our dependence on America like no one else has ever done. He threatened to pull out of Nato unless we spend more money on defense. And now one of the many unintended consequences of his war against Iran, which is a big political and military miscalculation, is that it exposes the weaknesses of our energy policies. It really is his war, and our problem.

If we have to pay for our own defense, our own energy security, and for Ukraine, out of our own pocket, then the math is quite simple: we can no longer afford cradle-to-grave welfare systems. We Europeans arrogantly look down on Americans because the US has food stamps where we have guaranteed citizens’ incomes. We Europeans lived in a delirious state, one in which we mistook our own pathetic dependence for cultural superiority. Once you are at such an advanced stage of delusion, it is going to be very difficult to reconnect back to reality. I don’t see any political party, in any European country, on the Left, the Right, or in the center, that has a concrete strategy for an independent Europe. All that is on offer is different forms of dependency.

This leads naturally to the question of what to expect going forward. Until about a decade ago, I was moderately optimistic that the EU, or rather the eurozone, could emerge as a vehicle for geopolitical power and independence. If the euro had been fortified by a capital markets union, and a sovereign debt instrument, the EU would have acquired an instrument of geopolitical force, very much in the way the US is exploiting the dollar, and its dominance of the global financial market, as a tool for geopolitical sanctions.

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The eurozone crisis was the moment when it became clear that the EU would not go down in this direction. It was a decision of historical importance. The opportunity came, and it went. The EU chose the soft option, a central bank bailout that transformed an acute crisis into the low-burner, long-term decay the EU finds itself in today.

The most probable way for change to occur is through an existential crisis, brought about by one of the four horsemen of the apocalypse: war, pestilence, famine or death. We had a pandemic. Then a war. Then another war. Fertilizer shortages might  lead to a famine. The global financial crisis was an important historical event, but it was not the big one. There is no preordained timeline to any of this. The state of delirium can easily outlast all of us. But however long it persists, it is unsustainable. This won’t go on — not because it shouldn’t, but because it can’t. A dependency is only ever sustainable if the side you depend on plays along. Trump has broken that link. I think it’s unlikely that even a Democratic successor would reestablish it. You can no longer be a drug addict when the supply runs out.

The real irony here is that we Europeans used to be the ones that others were dependent on. But no more.  Connally’s famous quip about the dollar being the US currency and Europe’s problem had a European precursor: the Austrian diplomat Klemens von Metternich. He once said of France, the dominant continental power in the 18th and 19th centuries, that “when France sneezes, the rest of Europe catches a cold”. Today, it’s America that’s sneezing — and Europe can’t shake its cold.

Right now, Trump has three choices. In scenario one, he sticks to his four-to-five week timetable, flattens the place, declares victory and gets out without destroying the Islamic Republic. The Strait of Hormuz would at this point not be truly secured. Scenario two is that he continues his campaign until the Strait is open, and he’s assured it’ll stay that way. That might involve using a limited number of ground troops to secure the Iranian coastline abutting the Strait. There would be no regime change in this scenario — but at least Washington would have reopened the Persian Gulf.

There’s also a third scenario: Trump concludes that, for as long as the existing Iranian regime is in power, the Strait cannot be secured. To get the job done, he must launch a full-scale invasion. Yet as Condoleezza Rice, national security advisor and later secretary of state under President Bush just reminded us, it took his administration a full year to prepare for the occupation of Iraq. There are currently no signs that an equivalent operation is being planned for Iran.

Scenario one would be the ultimate defeat, on the scale of Vietnam. It would stand as the greatest political and military misjudgment of our time — and for that reason alone, I would rule it out.

We are currently in the midst of scenario two. The difficulty commentators have during wars is that they’re not privy to classified information. Trump may have information that gives him the confidence to think America can totally destroy the Iranian regime’s military capabilities. I therefore can’t exclude the possibility that he is right, and that his critics are wrong.

History, however, would suggest otherwise. During the build up to the Iraq War, George W. Bush and Tony Blair wanted to believe the briefings they received from officials. Officials, for their part, delivered the briefings their political masters wanted to hear. I was a newspaper editor in Germany at the time, and attended one such high-level briefing. Unfortunately, the information I heard turned out to be completely wrong. The big conclusion I drew then is that privileged information doesn’t necessarily mean leaders make wise decisions.

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And certainly, based on what’s happening so far in Iran, it’s clear that the Trump administration misjudged the power of asymmetric warfare. It also misjudged the changed nature of military supply chains. Twenty years ago, military power was all about weapons of mass destruction, missiles, warplanes and tanks. And, to that extent, I do believe that the US has indeed succeeded in destroying a large portion of Iran’s conventional military infrastructure.

But the regime’s most potent weapons are mines and kamikaze drones, each costing just a few tens of thousands of dollars. If one of these were to hit an oil tanker, and cause an oil spill in the Strait of Hormuz, the effect would be devastating. No ship would be able to pass until the waters are cleared. And even if the US were somehow able to reopen the Strait, it would still have to protect every single ship — whereas the Iranians only need a single successful hit to close the Strait once more.

That’s asymmetric warfare: and the Iranians are leveraging their one and only strategic advantage for all it’s worth. They have already carried out drone and missile attacks on ships on oil installations in the Gulf states, and may also have laid mines in the Strait. The strategic objective of the Revolutionary Guards is very similar to strategies employed by both Russia and Ukraine: to come out on top in a prolonged war of attrition. The Iranian calculation is that the US will ultimately fold under economic and political pressure.

That may be the best strategy available to them, but it is not guaranteed to succeed. Scenario three, a full ground invasion, still looms in the background. If chickening out is politically catastrophic for Trump, and the current air campaign fails, what else can he do but prepare for scenario three? It is not what he wanted. But at the point when he finally makes the decision, it may be the obvious thing to do. If you have no other options left, the impossible becomes the inevitable.

Clearly, this would clash with what Trump long promised: no more wars in distant lands. Nor do I doubt that he meant it when he said it. But when you’re in the hot seat in the White House, your job is to manage conflicting objectives. When faced with a choice to unseat the Revolutionary Guards in a six-months ground war, or suffer a humiliating defeat, we should not automatically assume that Trump would choose the latter.

We should also not underestimate the role of Israel. I know that many inside the Israeli government expected Trump to force regime change in Iran at some point during his second term. And now, if Trump were to chicken out without getting the job done, he’d leave Israel humiliated and exposed. To be clear, the US is clearly the senior partner in the relationship, but Israel had at least some influence in Trump’s decision to go to war. Why, then, wouldn’t Netanyahu exert similar influence in how to end the conflict?

Of course, I am not predicting anything here. Unexpected events intrude. They already have. But based on what is publicly known, and on conversations I had ahead of the invasion, I would want to keep an open mind on any of those options. And since few people expect scenario three, I would call it the “underpriced” option. It is not necessarily likely, but a lot more probable than many think. Besides, an extended air campaign and boots on the ground are hardly mutually exclusive, and could overlap for a time.

Another factor here is how the Iran war interacts with Ukraine. For Europe, the rise in oil prices that resulted from the closure of the Strait of Hormuz is a geopolitical disaster. Why? Because it destroys the continent’s strategy to starve Russia of its oil revenues. The price of Urals oil, the benchmark for the oil sold by Russia, has risen from under $40 per barrel to almost $90 — and lately peaked at over $100. In February, before the Iran war started, Russian oil tax revenues had fallen to around $4 billion per month, after oscillating between $6-10 billion per month since 2022. If Urals oil stays at this price, meanwhile, Russian oil tax revenues would jump to around $10 billion a month: enough to fund Putin’s war.

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It’s obvious, then, that Europe’s strategy rested far too much on oil prices staying low, something I always thought was naive. Even before this month’s shock, Russia wasn’t running out of money, and now it definitely won’t. The truth is that Europe has no strategy for a Ukrainian victory — and never did. It’s just that now, this reality is becoming impossible to ignore.

As for the future, the oil markets are ominous. After initially taking a relatively optimistic view, they now expect a longer war. The Russians themselves believe that the oil prices will remain elevated for another year. And if Trump were to pursue his war for a longer period, he would really need to force Ukraine and Russia to cut some kind of deal. No wonder he’s already piling up pressure on the beleaguered Kyiv government. As Trump told NBC: “I’m surprised that Zelensky doesn’t want to make a deal. Tell Zelensky to make a deal because Putin’s willing to make a deal.”

Certainly, I don’t think it is possible for the West to fight two wars at once: against Russia in Ukraine and against Iran. The US is already running low on some supplies, while Ukraine itself is facing an acute shortage of air defense missiles. One war has to end for the other to proceed. And for Trump, Iran is the priority.

It would be comforting to know that a strategic operator is pulling the strings in the background, someone like Colin Powell, when he was chairman of the Joint Chiefs of Staff during the first Gulf War. Trump, unfortunately, has surrounded himself with sycophants. The image of Marco Rubio, secretary of state and national security advisor, being forced by Trump to wear shoes that are too big for him, tells us all we need to know. All I can say, then, is that the logic of war has taken over — and it’s driving America on.

But all the intelligence suggests that, even with an extended military campaign, the US cannot force one of its suggested aims: regime change in Iran. The Washington Post cited a classified report suggesting as much and I am hearing exactly the same thing from governments across Europe.

A long war would be disastrous for the global economy, with oil prices jumping to well over $100 a barrel, followed by higher inflation, higher interest rates and lower growth. Some European countries, including Germany, the Netherlands and now the UK, are already suffering low gas storage volumes. A short war would be just as bad: Trump loses his nerve, abandons the operation and leaves the antagonism in the Middle East to escalate. Even in this scenario it is far from clear that the flows of oil and gas would return to normal quickly.

The high oil price has already led the US to drop its oil sanctions against Russia. That would be headline news most days, but not today. Vladimir Putin has resumed oil deliveries to India, but this time not at a discount, but a premium. The Russians are back in business. Putin threatened last week that he is considering cutting all the remaining supplies to Europe. So a week into the US war against Iran and we are already looking at very different endgame scenarios for the Ukraine war. Wasn’t Russia supposed to go bankrupt?

Meanwhile, the West’s scenarios get progressively worse; the battlefield question has become an industrial one.

The West is currently facing a supply-chain crisis for military procurement. Even the world’s most powerful army cannot assume victory if the war lasts more than a few weeks. It may simply run out of key materiel. And the US is already running into bottlenecks. Contrary to Trump’s recent claims that the US has “a virtually unlimited supply” of munitions, Foreign Policy magazine reports that the war is already burning through the US/Israeli arsenal at such an alarming rate that the retaliatory destruction caused by Iran could take years to fix — and only then if the defense-critical minerals can be sourced. Tracing the military supply chains all the way back to their original sources, the journalists discovered that it is all but impossible to “instantly reverse decades of consolidated construction lines and atrophied mineral processing capacity”.

The decline set in decades ago. Back at the turn of this millennium, outsourcing was the cool thing to do, especially in the US. The service economy was the future then. And during this golden age of globalization, all the metal bashers wandered off to China, leaving the economies of the West to focus on higher value-added services such as finance. Coming from Germany, a country with a strong industrial tradition, I noted a good deal of contempt for industry among the elites of London or New York. I have argued myself that Germany overspecialized in some of the old-tech industries, such as cars. But getting rid of base industrial services, such as steel and chemical plants, is not smart for purely strategic reasons.

Metals, minerals and chemicals sit at the top of every supply chain, and most have to be extracted. These raw materials are then processed to produce those essential base materials like steel, aluminum, or magnets. The material goes through a number of further processing stages and if the final product is complex, like a military radar, or even a car, there will be many additional nodes in your supply chains. Small wonder the German car industry regularly breaks into sweat whenever China restricts the supply of any single piece of equipment — such as an essential mid-range semiconductor. Without it, their engines are useless.

But the specific advantage that both Russia and China have over the West is not simply their wealth of metals and minerals — it’s the fact that they can also process them. China’s expertise in processing its raw material is unparalleled: there is a lot of know-how in producing rare earth magnets from neodymium. And we are currently paying a heavy price for a service industry fetish. I blame the macroeconomists. There are no supply chains in standard macroeconomic models. The stuff just arrived at our door. These models worked in the fair-weather environment of a globalized, multilateral trading system, but not in our world today.

Were the Prussian military historian Carl von Clausewitz alive today, he would be taking an interest in supply chains. Back when he was in action, the key powers had plenty of blacksmiths and sweatshops to produce weapons, cannons and ammunition. Their bottleneck was money and soldiers. But he did understand that strategy was dependent on the “hard math of supply”. Today, you cannot claim to have a military strategy without a clear idea of your supply chains.

And if Putin and Xi Jinping understand one thing, it is industrial supply chains. Putin wrote his thesis on Russia’s mineral resources with a call for them to be nationalized. Western commentators obsessed over whether he plagiarized the thesis. But a far more important question is why he chose that particular sector as a theme to hone his plagiarizing skills, rather than finance.

Xi formed his economic views as a young man when he observed the decline of the Soviet Union, a country known for its smokestack industries. Xi became a champion of modern industry. He disproved the lazy thesis that governments can’t pick industrial winners. China is doing this all the time. The difference is that they are picking industries, not companies. They picked rare earths, magnets, car batteries, electric cars, solar panels, robotics, among others.

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Can any of us name any western leader with an interest in mining? Or a knowledge of downstream industrial processes? That’s for people in anoraks, isn’t it? Trump was a developer of prime property before he entered politics. Emmanuel Macron was an investment banker. Keir Starmer and Friedrich Merz were lawyers. Meanwhile, successive governments in America have chosen to transform industrial heartlands into a rust belt which has ultimately constrained its military-strategic options. It can choose to become protectionist, as it has done under Trump. Or it can pursue regime change in distant lands as it did under George W. Bush. But it cannot pursue both at the same time.

Imagine, then, the nightmare scenario for the West: the simultaneous invasion by China of Taiwan, by Russia of the Baltic Republics, and by North Korea of South Korea. I don’t think this is particularly likely because each has its own tactical and strategic timelines. For as long as Russia fights in Ukraine, it is not in a position to fight another land war.

But the West would not even be prepared for one of them. If China were to go for Taiwan now, the US might try to stop it — especially if China were to restrict supplies of semiconductors. But it is far from clear that Trump would be ready for a long fight with another nuclear superpower. If you are running out of missiles after a week of fighting against Iran, then how could you possibly take on another enemy?

I have to admit that I found Trump’s pacifism during the election campaign one of his more appealing characteristics. He appeared to have broken with the failed policies of some of his predecessors. The US war record is dismal. The country hasn’t had a successful conflict since Korea. They totally messed up the Middle East. I don’t want to speculate what, or who, got him into this one — he certainly doesn’t seem to know. But it will become the defining moment of his entire presidency.

Perhaps some of these scenarios can be mitigated. Certainly, the oil price could come down, as shipping in the Strait of Hormuz returns to normal. But what I cannot see is a scenario that brings peace and stability to the Middle East and which preserves economic stability in the rest of the world at the same time.

I can, however, see a scenario that delivers neither.

As brilliant as the story is, I think it is wrong. But it is wrong in a good, useful way. What it got spot-on is the observation that AI will change our lives like nothing before. The Luddites of this world, including members of my own profession, have persistently underestimated the impact of AI. The financial media, especially here in Europe, has been associating the term “AI” with the word “bubble”. Jason Furman, Barack Obama’s chief economic advisor, and now a Harvard economics professor, tweeted recently: “A few months ago the discourse was about whether or not AI was a bubble. Now it’s shifted to whether or not we’re about to enter a dramatically new era.”

This may have been the discourse in his profession, and the echo-chamber media like the Financial Times, The Economist, and Bluesky where all the economists hang out. But anybody who has seriously engaged with AI and its underlying technology has known for a long time that AI is not a bubble. Some market valuations may have been too optimistic, but the thing itself is rock-solid.

Take a look at the technology behind modern AI: the neural network. What it does is pattern recognition on an unimaginable scale. In 2012, a team led by the British computer scientist Geoffrey Hinton tested a neural network called AlexNet by tasking it with identifying 1,000 everyday objects from a collection of over one million pictures. Each picture came with a label, like “cup” or “spoon”. When the machine was fed the first picture, it made a random guess. Every time it got something wrong it changed the algorithm. Do this a million times, and you will eventually get there.

This is not how humans learn. But pattern recognition is also an important component of human intelligence. We think of chess grandmasters as very intelligent. A lot of their skill is memorization of a large number of moves combined with superior pattern recognition. One of the things AI has taught is to be much more careful in the way we think about human intelligence.

AI can even do things we would have previously classified as logical reasoning. But logical reasoning, too, includes, at least to some extent, memorization and pattern recognition. The mathematician Terence Tao recently reported that AI managed to find a mistake in one of his proofs. It also managed to come up with the proof of a conjecture in discrete mathematics. But AI is still a pattern recognition technology at its heart.

There is stuff that AI struggles with. It cannot do “context” in the way humans do. Tao made the point that if a human asks for tea, someone puts a cup in front of them and pours the tea into the cup. An AI robot, on the other hand, might take your demand literally and just pour the tea over your head. It is also not creative. It cannot be a Leonardo da Vinci, Vincent van Gogh or Pablo Picasso. But it can do cliché art, just as  humans can.

The question now becomes: will AI replace the bottom 10% of artists or 90% of them? This is where our story intersects with economics. If the answer is at the higher end of that range, most of us should probably start growing vegetables. I think the answer is more likely to be in the lower or the middle range.

In some sectors, AI has already started to replace humans. If you are a freelance advertising copywriter, chances are that you are struggling to find commissions. When the AI company Anthropic introduced legal plugins for its Claude Cowork platform, it took over the work of junior lawyers and legal assistants. It makes the senior lawyers more productive, but it did not get rid of lawyers.

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A fateful prediction came from Hinton himself, the godfather of the neural network.  In 2016, he predicted that within five years, AI would replace all radiologists. Back then, AI had become very good at detecting tumors on X-rays or other medical images. Hinton must have thought that looking at pictures is what radiologists do all day.

His prediction was completely wrong. One of the best datasets we have is from the Royal College of Radiologists in the UK. In 2015, the UK had 3,318 consultant radiologists. By 2024, that number has jumped to 4,923.

In a way, Hinton fell for the classic “lump of labor” fallacy — the idea that the supply of jobs in an economy is fixed. In our case, the fallacy is the idea that if AI takes half of our jobs, the rest of us have to share the remaining half. This is essentially what the Citrini report did too. It fell for the fixed pie fallacy.

When radio was introduced in the UK in the Twenties, people predicted the end of newspapers. When TV came in the Thirties, they predicted the end of radio and of newspapers. That did not happen because the new media expanded the overall market.

But today, a hundred years later, the newspaper industry finds itself in an existential crisis. This is not because the pie has stopped growing, but because newer business models replaced old ones. A lot more people work in the wider media industry today than they ever did before.

So, instead of asking how AI will affect the economy, we should ask three separate questions. What effect will it have on existing white-collar employment? Over what period? And will it eventually create more jobs than it destroys?

Citrini is probably right about the impact on existing white-collar jobs, but wrong about the timing and the creation of new ones. Machine learning is a long process. “I’m so old I remember when fully autonomous cars were going to be ready for mass deployment by late 2017,” tweeted the AI software developer and computer scientist François Chollet a few years ago.

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The robotaxi industry has made progress, but autonomous driving is stuck at level four out of five. By September last year, Waymo robotaxis had clocked 127 million miles collecting data without a driver in the car. When they reach level five, or full automation, they will be ready for a bigger rollout. They will still lack human intuition. They will not be perfect, but they will be better, on average, than humans because they don’t get angry, they don’t speed, they don’t send text messages while driving or fall asleep. When we get to the final level, Waymo will have been collecting data for some 20 years.

The American futurologist Roy Amara in the Seventies said that “we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run”. That applies to AI too. Just like how the discovery of electricity killed off the jobs of people who made a living by walking around the streets in the evening to ignite our streetlights, AI will destroy entire sectors. But its main economic effect is that it will make us more productive over time.

An economic meltdown is much less worrying than a political one. The de-industrialization of the early part of this century drove workers to support politicians of the Right. Now imagine if the same were to happen to sections of the white-collar middle classes.

Countries with flexible labor markets, such as the US, China, and to a lesser extent the UK, will be more affected by this, both positively and negatively, than countries with high degrees of employment protection such as France and Germany. The latter will probably avoid some of the disruptions in the short run, but the quid-pro-quo is that they will not benefit from the productivity gains that come from AI later.

All over the Western world we have seen a trend away from centrist politics to the extremes of the Right and Left. The middle class are the median voters. If they lose their jobs, so will their constituency MP or congressperson.

But the economy as a whole is going to be fine if only because it takes time for AI to replicate human skills. My more optimistic scenario rests on the fact that even the Luddites have finally caught on to this. We all have time to prepare.

After all, virtually all the tariffs will survive unaltered. In the short-run, the President is covered. On Friday night, immediately after the Supreme Court ruling, he invoked Section 122 of the 1974 Trade Act, signing an executive order to impose an immediate 10% tariff on the rest of the world. On Saturday, he raised that figure to 15%, the maximum allowed under the Act. The tariffs will kick in tomorrow — but despite what some journalists have claimed, none of this is “defying” the judges. On the contrary, Trump is merely implementing their ruling.

The catch is that Section 122 has a time cap of 150 days. That takes us until late July. At that point, Trump could get Congress to extend the period further. It may be possible, and legally more risky, for him to reset the clock. Or he could let the tariffs lapse before applying a new 150-day batch. Whether or not this holds up in court, it will buy him time to get ready for his real tariff fightback.

The point, here, is that all the Supreme Court did on Friday was tell the President that he should have picked a different legal basis for his tariffs. This is still a big deal — but not quite as big as you might imagine.

To understand exactly what happened requires a deep-dive into US trade law. When, on 2 April last year, Trump stepped into the White House Rose Garden to declare “Liberation Day”, he used a law dating from the Jimmy Carter era. The 1977 International Emergency Economic Powers Act, or IEEPA, was a response to the two oil crises of that decade. IEEPA gave the president unprecedented rights to act in response to a crisis, from freezing foreign assets to confiscating foreign property.

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Importantly, though, IEEPA says nothing about tariffs. Yet Trump picked it as the legal basis for his Liberation Day tariffs — and this is what the Supreme Court objected to. In essence, the Court ruled that the US faces no immediate emergency, unlike in the Seventies. In any case, tariffs fall under a different set of laws. The Court decided against the US administration with a majority of six to three, with Brett Kavanaugh one of the dissenting justices, and the legal disagreement essentially about who decides what constitutes an emergency.

In his minority opinion, Kavanaugh made one point that is not contested: that the ruling would have little effect in real life. As he puts it “numerous other federal statutes” allow Trump to impose tariffs legally — “albeit perhaps with a few additional procedural steps”.

What are those procedural steps? Quite simply the two big trade acts through which presidents normally levy tariffs on other countries. They’re hardly arcane: Joe Biden used them too. The first is the Trade Expansion Act of 1962, specifically Section 232 on national security. It allows the president to levy tariffs on products he deems to be a potential threat to national security. The Trump administration already levied tariffs on several products under this act — cars and trucks, steel and aluminum. There is also copper, furniture, lumber, and timber. The Supreme Court ruling has no effect whatsoever on these Section 232 tariffs, and indeed the Trump administration may yet use it to stick tariffs on foreign airline parts and pharmaceuticals. If this happened, the Canadians and the Europeans would suffer most.

Section 232 tariffs only concern goods for which a national security argument can be made: notably critical raw materials. Dolls imported from China, or French luxury handbags, clearly do not fall into that category. The heavy lifting that yielded most of America’s tariff revenue before Trump’s Liberation Day announcement came from Section 301 of the 1974 Trade Act. That’s also where most of the action on future tariffs will come from, now that the Court has blocked the IEEPA route. Section 301 is about unfair trading practices, like violations of trade agreements, or any policies that are deemed to discriminate against US businesses. Trump will have little difficulty here, with Section 301 playing into his rhetoric that foreign trading partners are out to cheat America.

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That, of course, still leaves one question: why did Trump go down the IEEPA route to start with, when he had these other laws at his disposal? The answer involves understanding the President himself. Trump is a man of transactions, not procedures — and both the 1962 and 1974 acts are heavy on procedure, typically taking about a year to enact. In the case of Section 232, the Department of Commerce must first investigate the effects of the relevant imports on national security. There are maximum, but no minimum, time limits. There are no formal appeal procedures, but there are legal safeguards in place to prevent the process from being cynically short-circuited. The investigation takes at most 270 days, after which the president has 90 days to decide whether to act. In practice, the process is a little faster, but not much. Back in 2017, Trump’s tariffs on steel and aluminum took almost a year to enact.

Section 301, too, requires a formal procedure, in this case by the US Trade Representative. A typical 301 investigation takes 6-12 months from start to finish. Those investigations come with depositions and hearings, and end with a long report. After four years, the tariffs must be reviewed.

Bureaucracy, in short, intrudes. This explains why Trump first chose IEEPA as the legal basis for its tariffs: for its speed and what we might therefore call its “threat factor”. Not for nothing did Scott Bessent, the US treasury secretary, once refer to tariffs as the gun on the table.

Yet if the 1962 and 1975 acts are big on paperwork, Kavanaugh is again right that Trump will ultimately be able to get his way — and Congress will be unable to stop him. Another advantage of both laws, after all, is that they are firmly in the president’s gift to enact.

Here, then, is the timeline: the temporary 15% tariffs will kick in this week, buying Trump the space to impose the bureaucratic procedures that make them permanent. He could even end up raising the total level of tariffs if he so wished; I myself foresee a scenario where tariffs on cars from the EU and the UK go up by a tenth. That is even as he uses the law to bolster his broader argument about America’s economic position. “They rip us off,” he said of the EU a year ago. Well, that is precisely what Section 301 is about.

So if you hate Trump, you may well celebrate the Supreme Court ruling as a symbolic defeat. If, however, you hate the tariffs, you have no reason to cheer: the powers of the President to impose tariffs unilaterally are not affected at all.

Why, then, are people celebrating? I’m reminded here of the lawfare against Trump ahead of the 2024 election. I remember the BBC in particular expressing gleefully confidence that the New York criminal case against Trump would deprive him of the means of launching an effective campaign. In that particular case, the US Supreme Court came to Trump’s rescue. What has always helped Trump is a tendency by his opponents to overestimate the effect of legal games.

A deluded German commentator described the ruling as an “embarrassment of historic proportions”. There is an awful lot of “peak Trump” commentary about. Statements such as these may be designed to make us Europeans feel better, but they just don’t hold up to scrutiny. The tariffs were Trump’s most important economic policy decision — and they will stay, even as he has almost three more years of his four-year term.

The real problem with Trump is not that he is a buffoon, but that he learned how to game the political system. Not all of the mud he throws will stick. But a lot will. The President may no longer hold his tariff gun, but an economic bazooka remains, and it is pointing at the rest of us.

Europeans hated Vance’s speech. Yet they loved Rubio’s. The difference was tone. Unlike Vance, Rubio sugar-coated the message. “For us Americans,” he said, “home may be in the Western Hemisphere, but we will always be a child of Europe.” Europeans just love it when Americans show respect for their cultural heritage. It flatters their sense of pride — and superiority.

Europe is deluded, though. And when European Commission President Ursula von der Leyen popped up to say she felt very much reassured, it reminded me of that old quip about diplomacy, often, probably wrongly, attributed to Winston Churchill: “Diplomacy is the art of telling people to go to hell in such a way that they ask for directions.”

In the 12 months between those two Munich speeches, the transatlantic relationship has changed beyond recognition. As Matthew Whitaker, US ambassador to Nato, put it so bluntly last week, “We want Europe to take over the conventional defense of the European continent.” The US may remain part of the Nato infrastructure. But the truth is that today we are home alone in Nato. Our old security guards are watching over someone else’s house.

Instead of accepting this new reality, Europe is convinced there will be a return to the status quo ante: President Donald Trump is deemed an aberration; once he is gone, transatlantic relations will return to normal. Only half of this is true. Trump is no doubt an aberration. And he will be gone in three years. But his security doctrine will endure.

For even though Trump, with his tweets and tariffs, can be unpredictable, Washington’s security policy is remarkably consistent. We know from the White House’s National Security Strategy that the Western Hemisphere — the Americas — is the priority. Asia comes second. Europe third. The US has no interest in getting out of Nato. The alliance still serves an important purpose for Washington — albeit a different one from Europe.

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The US disengagement from European security is part of a broader game plan as it prepares for a worst-case scenario: a Chinese attack on Taiwan, coupled with a simultaneous Russian attack on western Europe and a North Korean attack on South Korea. If you think strategically about such a war scenario, it is clear that the US cannot simultaneously fight a war in east Asia and in Europe. Burden-sharing in the Nato alliance would require the Europeans to look after their own turf.

As a result, Washington is locking in material changes that will be difficult to reverse. For one thing, Europeans are receiving a higher allocation of jobs in Nato’s command structure, and all three regional commands will be led by Europeans. Germany and Poland will share command of Joint Force Command Brunssum — responsible for central and eastern Europe — on a rotational basis.

It has, in any case, been the policy of successive US administrations, both Republican and Democrat, to push Europeans — or “free-riders” as Obama termed it — into shouldering a greater defense burden. But these efforts were repeatedly frustrated by Europe’s dishonest commitments on defense spending targets. That lamentable state of affairs ended under Joe Biden when Russia invaded Ukraine. Europeans would be naive to think that even a pro-European Democrat in the White House would want to reverse this.

Nor should the Europeans have their heads turned by those Democrats at the Munich conference, notably Alexandria Ocasio-Cortez and Gavin Newsom, who encouraged them to stand up to Trump. I think this is bad advice. They are abusing the international stage for domestic politics. Most US governors and lawmakers are unaccustomed to thinking in terms of foreign policy strategy until the moment they meet their security advisers and chiefs of staff in the White House Situation Room for the first time.

But as they move through the stages of grief over the death of the transatlantic relationship, the Europeans are struggling. They are not yet ready to accept this new world. Just look at the mess they created over Ukraine. Richard Shirreff, who served as Nato’s Deputy Supreme Allied Commander Europe, has castigated Europe and Canada for failing to develop and implement a strategy to support Ukraine. He wants the Europeans to distance themselves from the US, and organize their own defense, the very opposite of Mark Rutte’s “Trump whisperer” approach. Rutte later defended his attitude to “daddy”, telling the European Parliament: “If anyone thinks here … that the European Union or Europe as a whole can defend itself without the US, keep on dreaming.” While this is indeed a fair description of the status quo, I also think that Rutte’s desperate attempt to keep the US in its current role as Europe’s lord protector is a disaster.

I am not going to rule out the possibility that the Europeans will eventually measure up to the challenge and take responsibility for their own security. But right now that looks unlikely. The main issue is not defense spending, but how we organize our mutual defense. And that is hopelessly inefficient. Each European country has its own command structure. Everybody has their own procurement policy. Many have their own weapons systems. The European Nato countries have 10 different battle tanks in operation; the US has one. The Europeans have different fighter aircraft, air defense systems, and howitzers.

The consequences of such fragmentation are costly. According to analysis by Bain, the average cost of 155mm ammunition is around $4,000, whereas the Russians pay $1,000 for 152mm shells. The figures are not strictly comparable, but they do indicate the scale of Europe’s disadvantage. To match Russia’s defense spending, we would have to spend four times as much as they do. Similar numbers also apply to other categories of defense spending. Simply increasing budgets without centralizing procurement would be a waste of money.

The Europeans have started to increase their defense spending. But they are not willing to abandon their cherished sovereignty in favor of a common procurement policy, let alone a common command structure. Without that, I cannot see how Europe’s efforts to become self-reliant can conceivably succeed. Some of the largest European countries, like France, have no fiscal capacity left. Consolidation and pooling of procurement is the only low-hanging fruit. If your enemy has a one-to-four cost advantage over you, you will lose. Even if we turned ourselves into a war economy, we would struggle to buy what they can buy.

Right now, France and Germany care more about their own domestic defense industries and reject the pooling of defense procurement. The only scenario where I can see this changing is one in which such a decision were forced upon them through a war: it’s hardly one we should wish for.

This is why the situation is so bloody dangerous. We have exited one dysfunctional security framework, but we have yet to enter a new one. We are stuck between two worlds. Anything could happen.

Economists like to describe such scenarios — which concern three desirable but incompatible goals — using the metaphor of impossible triangles. Here is one for defense: a reduced American contribution to Europe’s conventional defense; a European reluctance to pool defense procurement and weapons systems; and a high degree of security. The first of these three — the US withdrawal from Europe’s defense — has become a reality. Europe must now reconcile the remaining two.

The Americans have just sent the Europeans to hell. And the Europeans are asking for directions.

The actors have changed since then and so have their methods. What is unchanged is the idea that political power is about the control of the media. This is why the US and the EU have been engaged in a raging dispute over social media regulation and content moderation since JD Vance criticized the Europeans at last year’s Munich Security Conference for suppressing free speech.

Last week, the EU told TikTok it must become less addictive to its users or else face heavy fines. In December, the EU imposed a fine of €120 million on X for failing to moderate its content as required by the EU’s Digital Services Act (DSA). Very Large Online Platforms (VLOPs) like X, Facebook or TikTok are obligated to employ fact checkers and post community notices to highlight fake news. In France, failing to do so counts as a criminal offense. A French prosecutor has recently summoned Elon Musk to a hearing in Paris. Pavel Durov, the Russian founder of Telegram, was arrested upon landing in France in August 2024.

The Europeans have totally misjudged what is going on. For the Trump administration, European censorship rules of US social media is the single biggest issue in transatlantic relations. Donald Trump and the hard-Right in Europe owe their ascent to digital media. The ability to bypass the oligopoly of the legacy print and broadcasting media was critical to Trump’s two election victories. The EU’s old establishment parties are fighting a desperate battle to keep digital forces at bay. Just look at what’s happened to the venerable Washington Post. In 2017, when Trump came to power for the first time, the paper gave itself the motto “Democracy Dies in Darkness”, a cry of despair. Now, it’s fired 300 journalists. The decline of the traditional media and the rise of the MAGA movement are linked.

In continental Europe and the UK, the old media oligopoly is more robust than in the US, but it is much weaker than it used to be, and is getting weaker every year. By and large, the political establishment still controls the legacy media. The legacy media, though, is losing control of the narrative.

This is the context in which the DSA should be understood. It forces large social media companies to issue DSA-compliant community guidelines to which users must agree. It does this with the help of so-called “trusted flaggers”, which are often NGOs and are nominated by national governments. One such organization is HateAid, a German group which was recently subjected to US sanctions. The trusted flaggers act as the internet’s truth commissars, identifying what they perceive to be violations of the rules. They directly alert the platform, and the European Commission monitors whether the company reacts to the warnings and can impose penalties as it did against X.

Washington is now preparing to respond. The FT reported last week that a senior state department official, Sarah Rogers, met with Right-wing think tanks in Europe to discuss funding to spread the MAGA gospel or, as she put it, American values. At its core this US-EU dispute is about the diffusion of MAGA political themes in Europe. Think tanks and civil society organizations play an important role in the public discourse. In Europe, they are mostly on the Left.

That story chimes with the leak late last year of a draft version of the administration’s National Security Strategy. The final, official version was already hostile towards the Europeans. It talked about civilizational erasure, and criticized transnational bodies — meaning the EU — which are “transforming the continent and creating strife, censorship of free speech and suppression of political opposition”. The earlier draft went further, though, containing a passage in which the US committed itself to pry countries away from EU membership. While that was not included in the final version, Rogers’s comments suggest that this is indeed the policy.

The Americans have other instruments at their disposal. Trump could impose his favorite instrument: tariffs. He could do so even if the Supreme Court were to rule against the legality of his Liberation Day tariffs. Retaliatory tariffs against countries that discriminate against companies fall into a different category.

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The companies themselves might push back. EU legislation applies only to companies and their subsidiaries with a physical residence in the EU. X or Meta might close down their European offices, forgoing some revenue in the process. That might be a price worth paying to safeguard an otherwise lucrative business model. The EU does not have alternative providers.

European voters might also rebel against the bloc. With its data protection legislation, AI and crypto regulation, the Digital Services Act, and the Digital Markets Act, the EU has built a kind of Luddite wall against 21st-century technologies, most of which originate in the US. The idea of Europe as a museum or a tourist destination may be charming; it is not, however, a sustainable economic model. The more the Commission decouples from modern technologies and services, the more unsustainable its strategy becomes.

This political battle is about agenda-setting and control. It is not really about free speech — that is a straw-man debate. It is true that the Europeans are restricting the spread of Right-wing content and turning people into criminals for posting a tweet. But Trump’s America is not exactly a bastion of free speech either. Last year, Rümeysa Öztürk, a Turkish PhD student at Tufts University, was arrested and earmarked for deportation for writing an article in which she criticized her university for how it handled pro-Palestinian protests. She was held in a detention camp until a judge ordered her immediate release. Marco Rubio said at the time: “We gave you a visa to come and study and get a degree, not become a social activist that tears up our university campuses.” The US is in no position to teach the Europeans about free speech.

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Philip Graham, the previous owner of The Washington Post, once called journalism “the first rough draft of history”. As historians know only too well, historical drafts often get completely rewritten over time. What appears true today is often revealed as false tomorrow. The idea that we can put somebody in charge of the truth is absurd. Yet it is no less absurd than the attempt to restrict foreign students in the US to write articles in student newspapers.

The reason why the EU will lose this battle is straightforward and has nothing to do with free speech. It will lose because the US is the senior partner in the bilateral relationship. It is Europe’s tragedy that it made itself reliant for its defense and technology on somebody with whom it no longer shares its basic values.

The DSA is a rebellion, but it falls into the category of failed putsches. It recalls the Spanish military’s attempted seizing of the Spanish parliament in 1981. The putsch failed because the junta did not control the narrative. It ended after only 18 hours when King Juan Carlos I went on national TV to denounce the putschists and ordered them to go home.

Forty-four years later, the Europeans no longer have such power, and they won’t get it back.